América

Calle 13 – Latinoamérica
Directores Jorge Carmona y Milovan Radovic
Productor Alejandro Noriega
Patria Producciones


Soy, soy lo que dejaron,
Soy las sobras de lo que te robaron,
Un pueblo escondido en la cima,
Mi piel es de cuero por eso aguata cualquier clima,
Soy una fábrica de humo,
Mano de obra campesina para tu consumo,
En el medio del verano,
El amor en los tiempos del cólera,
¡Mi hermano!

Soy el que nace y el día que muere,
Con los mejores atardeceres,
Soy el desarrollo en carne viva,
Un discurso sin saliva,
Las caras más bonitas que he conocido,
Soy la fotografía de un desaparecido,
La sangre dentro de tus venas,
Soy un pedazo de tierra que vale la pena,
Una canasta con frijoles.

Soy Maradona contra Inglaterra
Anotándole dos goles.
Soy lo que sostiene mi bandera,
La espina dorsal de mi planeta, en mi cordillera.
Soy lo que me enseño mi padre,
El que no quiere a su patria no quiere a su madre.
Soy América Latina un pueblo sin piernas pero que camina.

Tú no puedes comprar al viento,
Tú no puedes comprar al sol
Tú no puedes comprar la lluvia,
Tú no puedes comprar al calor.
Tú no puedes comprar las nubes,
Tú no puedes comprar mi alegría,
Tú no puedes comprar mis dolores.

Tengo los lagos, tengo los ríos,
Tengo mis dientes pa cuando me sonrío,
La nieve que maquilla mis montañas,
Tengo el sol que me seca y la lluvia que me baña,
Un desierto embriagado con pellotes,
Un trago de pulque para cantar con los coyotes,
¡Todo lo que necesito!

Tengo a mis pulmones respirando azul clarito,
La altura que sofoca,
Soy las muelas de mi boca mascando coca,
El otoño con sus hojas desmayadas,
Los versos escritos bajo las noches estrelladas,
Una viña repleta de uvas,
Un cañaveral bajo el sol en cuba,
Soy el mar Caribe que vigila las casitas,
Haciendo rituales de agua bendita,
El viento que peina mi cabello,
Soy todos los santos que cuelgan de mi cuello,
El jugo de mi lucha no es artificial porque el abono de mi tierra es natural.
Vamos caminando, ¡vamos dibujando el camino!

Trabajo bruto pero con orgullo,
Aquí se comparte lo mío es tuyo,
Este pueblo no se ahoga con marullos,
Y si se derrumba yo lo reconstruyo,
Tampoco pestañeo cuando te miro,
Para que te recuerdes de mi apellido,
La operación cóndor invadiendo mi nido,
Perdono pero nunca olvido, ¡oye!

Vamos caminado, aquí se respira lucha.
Vamos caminando, yo canto porque se escucha.
Vamos caminando, aquí estamos de pie.
¡Que viva Latinoamérica!
¡No puedes comprar mi vida!



Calle 13 - Latinoamérica
Directores Jorge Carmona y Milovan Radovic
Productor Alejandro Noriega
Patria Producciones


Soy, soy lo que dejaron,
Soy las sobras de lo que te robaron,
Un pueblo escondido en la cima,
Mi piel es de cuero por eso aguata cualquier clima,
Soy una fábrica de humo,
Mano de obra campesina para tu consumo,
En el medio del verano,
El amor en los tiempos del cólera,
¡Mi hermano!

Soy el que nace y el día que muere,
Con los mejores atardeceres,
Soy el desarrollo en carne viva,
Un discurso sin saliva,
Las caras más bonitas que he conocido,
Soy la fotografía de un desaparecido,
La sangre dentro de tus venas,
Soy un pedazo de tierra que vale la pena,
Una canasta con frijoles.

Soy Maradona contra Inglaterra
Anotándole dos goles.
Soy lo que sostiene mi bandera,
La espina dorsal de mi planeta, en mi cordillera.
Soy lo que me enseño mi padre,
El que no quiere a su patria no quiere a su madre.
Soy América Latina un pueblo sin piernas pero que camina.

Tú no puedes comprar al viento,
Tú no puedes comprar al sol
Tú no puedes comprar la lluvia,
Tú no puedes comprar al calor.
Tú no puedes comprar las nubes,
Tú no puedes comprar mi alegría,
Tú no puedes comprar mis dolores.

Tengo los lagos, tengo los ríos,
Tengo mis dientes pa cuando me sonrío,
La nieve que maquilla mis montañas,
Tengo el sol que me seca y la lluvia que me baña,
Un desierto embriagado con pellotes,
Un trago de pulque para cantar con los coyotes,
¡Todo lo que necesito!

Tengo a mis pulmones respirando azul clarito,
La altura que sofoca,
Soy las muelas de mi boca mascando coca,
El otoño con sus hojas desmayadas,
Los versos escritos bajo las noches estrelladas,
Una viña repleta de uvas,
Un cañaveral bajo el sol en cuba,
Soy el mar Caribe que vigila las casitas,
Haciendo rituales de agua bendita,
El viento que peina mi cabello,
Soy todos los santos que cuelgan de mi cuello,
El jugo de mi lucha no es artificial porque el abono de mi tierra es natural.
Vamos caminando, ¡vamos dibujando el camino!

Trabajo bruto pero con orgullo,
Aquí se comparte lo mío es tuyo,
Este pueblo no se ahoga con marullos,
Y si se derrumba yo lo reconstruyo,
Tampoco pestañeo cuando te miro,
Para que te recuerdes de mi apellido,
La operación cóndor invadiendo mi nido,
Perdono pero nunca olvido, ¡oye!

Vamos caminado, aquí se respira lucha.
Vamos caminando, yo canto porque se escucha.
Vamos caminando, aquí estamos de pie.
¡Que viva Latinoamérica!
¡No puedes comprar mi vida!



Open Economy and Global Financial Crises

David Felix,
Washington University in St. Louis

Presented at the 9th Annual Hyman P. Minsky Conference on Financial Structure,
Jerome Levy Economics Institute,
April 21-23, 1999.

Introduction: When Theory Matters

In the 1930s mainstream economists reacted to the deepening crisis by abandoning the policies that derived from their macroeconomic theory, but without abandoning the theory. To quote Minsky:

Keynes’ novelty and relative quick acceptance as a guide to policy were not due to
his advocacy of debt financed public expenditure and easy money as apt policies to
reverse the downward movement and speed recovery during a depression. Such
programs were strongly advocated by various economists throughout the world. Part
of Keynes’ exasperation with his colleagues and contemporaries was that their
policies did not follow from their theory [Minsky 1982: p.97].

Did this matter? Yes. As the post-WW II recovery took hold, various aspects of pre-1930s mainstream macroeconomic theory emerged from the closet to provide the theoretical rationale for a progressive whittling away of Keynesian policies. The notion that the self-adjusting properties of capital markets will move capitalist economies back to full employment-full capacity growth paths reappeared in various guises.

The Great Depression was reduced to an aberration, the result of a worst case mix of bad policies that was unlikely to be repeated. Keynes had managed to get permanent acceptance of capital controls included in the Bretton Woods Articles of Agreement, a task greatly facilitated by the fact that Article VI legitimized controls already in place in most of the participating countries.1 But with the post-war recovery the controls and the Bretton Woods pegged exchange rate system itself came under increasing attack from Chicago for distorting resource allocation rather than correcting market failures.2 Concurrently, the Neoclassical-Keynesian synthesis had refocused attention from the financial to the labor market as the fundamental source of cyclical instability. When a resurgence of speculative capital flows in the late 1960s threatened the pegged exchange rate system, it was intellectually facile for proponents of the synthesis to buy into the Chicago solution of flexible exchange rates and capital decontrol. By the early 1970s mainstream economists had reassumed most of the basic tenets and policies of their laissez-faire predecessors that Keynes had attacked.

Ironically, what had become the heterodox branch of Keynesian economists, with their perception of capitalist dynamics as crisis prone, won most of the post-war theoretical debates with their neoclassical-synthesis opponents. The capital theory controversy destroyed the validity of marginal productivity as the basic determinant of factor shares in an economy with heterogeneous capital, thereby undermining an essential component of the alleged self-adjusting properties of a capitalist economy. Minsky’s financial instability hypothesis (hereinafter the FIH) further undermined the neoclassical claim that full employment was the unique rest point of long-run market dynamics. It emphasized that multi-period financial commitments linked to the construction and exchange of capital assets whose income streams are uncertain, necessarily cause the long-term growth path of laissez-faire capitalism to be path-dependent and crisis prone, in which periods of stable, full employment growth tend to self-destruct.

But the debate took place during the “Golden Age of Capitalism,” an era of unusually rapid and stable growth of output, employment, productivity and real wages.

The industrialized countries were behaving as if stable full employment growth was the norm, rather than the exception, and economists had begun asking whether the business cycle was now obsolete. The heterodox may have won the theoretical debates, but factually their victories could be dismissed by the vanquished as small beer. Minsky could write about debt deflation and single out potential post-war crises that had been aborted by timely Fed interventions. But by the end of the 1970s even he was persuaded that “It” would not happen again, because big government and built-in stabilizers were a permanent feature of post-war capitalism that would act as an effective buffer against systemic liquidity crises and debt deflation. [Minsky, 1982].

So mainstream economists lauded the replacement of the Bretton Woods pegged exchange rate system in the 1970s by floating rates, persuaded that rapid rate adjustments would now abort currency speculation, and allow more national autonomy over macroeconomic policies. They hailed the progressive lifting of capital controls and the ensuing explosion of international financial flows in the 1980s as advancing the efficient allocation of global resources. The IMF, with assists from the World Bank, the OECD and regional development banks (collectively, the IFIs), began pressuring developing countries to “get prices right” by liberalizing imports, floating the exchange rate, lifting “financial repression” and capital controls, privatizing state assets, and adopting “sound” monetary-fiscal policies. Article VI, still part of the IMF’s charter, became an embarrassment, since the IMF was honoring it in the breach. It began campaigning in the 1990s to get the article replaced by one requiring all IMF members to commit to full capital decontrol.

Results have fallen well short of expectations. Real as well as nominal exchange rate volatility have kept increasing, as has currency speculation. The incidence of systemic bank and balance of payments crises with serious international repercussions have become more frequent, and most economies have fallen into a prolonged post-Bretton Woods growth slowdown. For a time the proponents comforted themselves that the fault lay in the implementation, not the strategy; governments needed simply to accelerate market liberalization and get the sequencing right. Proponents also took comfort from the volatility of the expanding capital flows. It meant that the financial markets were doing double duty. They were not merely allocating more global resources in efficiency enhancing directions, but were also moving the liberalization process along by rewarding “sound” policies with capital inflows and punishing “unsound” policies with capital flight.

However, long before the current international crisis broke out, “sound” policies began losing substance. In the so-called “first-generation” of crisis models, capital flight occurs because the government is trying to sustain excess aggregate demand that is spilling over into a growing import surplus, by using capital controls to protect an increasingly overvalued exchange rate. Financial capital, recognizing the fragility of the effort, begins exiting the currency through evasive channels. This drains official reserves, which opens the floodgates for an all-out speculative attack [Krugman 1979]. Eliminating excess demand by tighter monetary-fiscal policies and lifting capital controls would allow the exchange rate to settle at a speculation-free equilibrium. These measures formed the core of the “sound” policy set on which the IMF conditioned its credits. But in the context of open capital markets, floating rates had undesirable feedbacks on the price level and on capital flows. Latin American countries, beset by near hyper-inflation in the aftermath of their 1980s debt crisis, shifted, with IMF acquiescence, to pegging or semi-pegging the nominal exchange rate to anchor the price level, which meant overvaluing the real rate, that is, “getting prices wrong.”

Encouraging larger capital inflows—a major desideratum of the IMF—reinforced its acceptance of pegging the nominal exchange rate. The IMF continues to insist on “sound” exchange rate policy, but in the past decade it has been “talking the talk” without being sure which way to “walk.”

Balancing the budget, and raising interest rates, other major components of the “sound” policy package, have also been sandbagged by events. The speculative attack which broke up the semi-fixed Exchange Rate Mechanism (ERM) of the European Monetary System in 1992-93 succeeded in forcing devaluation on countries that had neither an unduly large current account nor fiscal deficit [Eichengreen and Wyplosz, 1993]. The event popularized “second generation” multiple equilibria models among academic economists, in which governments give in and reward the currency speculators with a depreciated exchange rate that reduces economic welfare because the economic and political costs of defending the existing rate against the speculative onslaught have become too high.3

The IMF, however, persisted resolutely in making monetary-fiscal austerity the centerpiece of its “sound” policy set through the first year of the Asian crisis. Since then, under attack from a growing segment of mainstream economists for needlessly worsening the Asian crisis, and fearing political upheavals, the persistence has become less resolute.

In Thailand, Indonesia, and Korea, the IMF eased up in the second year and allowed substantial fiscal deficits in order to reverse declining aggregate demand, though that reflects a tactical adjustment rather than a doctrinal epiphany.4 The current bailout packet for Brazil is conditioned on fiscal austerity and higher interest rates.

The essence of the criticism of the IMF, is echt Minsky FIH [Kregel, 1998], although most mainstream defectors dare not mention the name. The IMF has been severely worsening matters by applying “first generation” corrective policies—high interest rates and fiscal austerity—to situations where the immediate need was to minimize debt deflation by sustaining liquidity and aggregate demand and getting creditors to roll over loans and extend debt servicing while most of the indebted domestic firms and banks still had positive present value. Instead, the IMF policies produced interest rate spikes, credit crunches, and collapsing aggregate demand that maximized debt deflation, forcing a high proportion of the domestic firms and banks to become Ponzi units, i.e. insolvent.

With the Asian crises worsening Japan’s and spreading to other regions, “there is, in short, a definite whiff of the 1930s in the air.” [Krugman 1999; p.58]. “It” may indeed be happening again. Krugman’s recent essay is especially interesting because his assessment of, and policy prescriptions for, the unfolding crisis, Minskyish in all but name, are at odds, as he candidly admits, with the neo-classical-Keynesian synthesis to which he still adheres. It raises again the question, if the policies are appropriate does it matter if the theory is not?

Again the answer is yes. Krugman sees the 1990s “It” as merely another anomaly rather than a systemic phenomenon. Emergency measures are required: developing countries should adopt capital controls; Japan, caught in a liquidity trap, should try harder to inflate; other industrial countries should avoid the liquidity trap and minimize debt deflation by reorienting monetary policy to low inflation rather than price level stability.

But the long-run still belongs to the neoclassical-Keynesian synthesis plus the Philips Curve, although with free capital mobility also a long-run desideratum, the “impossible trinity” limits the feasible exchange rate choices to either floating or forming currency unions within optimum currency areas. Thus while Krugman’s prescription for the current crisis is heterodox, his perspective on longer-term reform of the “architecture” of the international financial system in order to minimize the recurrence of future “Its” remains largely shaped by orthodox notions about capital market dynamics that are at odds with the FIH and its policy implications.

A fundamental implication of the FIH is that without restrictions on capital market dynamics neither exchange rate choice is a barrier against crises. Minsky, however, placed his FIH theorizing and policy implications in a closed economy setting.

Does free capital mobility reinforce or undermine its insights? I contend that it reinforces the relevance of the FIH, but weakens the relevance of the major policy inferences that Minsky drew from it. Nevertheless, a weaker set of stabilizing policies compatible with the FIH may be technically and politically feasible, despite constraints of national sovereignty and the heterogeneity of the world economy. The remainder of this paper elaborates on these contentions.

The Financial Instability Hypothesis vs. the Efficient Market Hypothesis in a World of Open Capital Accounts

At first glance, a world of open capital accounts appears to undermine the relevance of the FIH. Unless all countries are simultaneously in the fragile phase of their domestic FIH, those in that phase should by raising interest rates sufficiently be able to abort incipient credit crunches and debt deflation by drawing in capital flows from countries in the more robust phase of the FIH. But the FIH also holds that the fragile phase is the outcome of increasing leveraging by both borrowing firms and lending banks, and ebullient overvaluation of capital assets by the equity markets which deteriorates the quality of loan collateral. The liquidity squeeze that ensues and brings on a financial crisis is due to a sharp upward reassessment of lender risks. An inflow of
foreign finance that aborts the crisis therefore implies that foreign lenders disregard this reassessment.

The case for opening capital accounts globally rests on micro-foundations that validate such disregard. The inflows are normal responses because financial markets, absent regulatory distortions, behave efficiently. They are composed of rational wealth maximizing entities who therefore strive to process correctly all available information about the fundamental factors that determine the yields and risks of loans and of the
capital assets that collateralize the loans. Lenders operating in a lower interest rate environment will always be attracted to higher interest borrowers, provided the interest spread is high enough to incorporate the lender’s correctly assessed risk premium.

Lifting capital controls merely extends these efficient market dynamics to the global economy. The FIH is inapplicable not only to open economy financial relations but to closed economy ones as well.

Both the FIH and the EMH are simplified approximations intended to highlight the essentials of complex dynamic processes and to inform policy. The EMH, however, has been forced to attach successive ad hoc qualifications, Ptolemaic fashion, to its core premises and associated policies in order to protect them from falsifying events. On the other hand, while the FIH in its current state falls short of adequately explicating open economy financial dynamics, it can be readily improved without abandoning its basic structure.

Thus from the EMH perspective the rapid expansion of portfolio and direct capital flows accompanying the decontrol of the OECD capital markets must have represented a major transfer of real resources to more efficient uses. Yet Martin Feldstein and associates have convincingly shown that the high correlation between domestic savings and investment that prevailed in the OECD countries prior to decontrol declined only negligibly after decontrol [Feldstein 1994]. What have declined precipitously from 1960s rates in all the OECD countries have been the growth rates of labor, capital and total factor productivity of the business sector, and somewhat less precipitously, real GDP growth rates [Felix 1997/98, tables 2, 6]. Such trends patently contradict the improved efficiency claims.

Global forex transactions per trading day have risen from $18 billion in 1977 to $1.5 trillion in 1998, and from 3.5 times the global export of goods and services in 1977mto 60 times in 1998 [Felix 1997/98, table 1; Economic Report of the President 1999, Box 6-1]. The connection between forex flows and trade financing has obviously been attenuating as has the impact of trade imbalances on exchange rates. For a time EMH adherents lauded these developments as efficiency enhancing, since much of the rising forex flows related to greater hedging against exchange risk, and increased opportunities for beneficial arbitraging of asset prices that the opening of capital markets made possible. But the increased hedging demand has been provoked by the greater exchange volatility which the increasing forex flows were producing. The creation of novel hedging instruments by financial houses, moreover, not only spread risks but created new ones by extending the chains of liability commitments linked to the hedging operations.

And since risks can only be hedged incompletely, the financial innovations have expanded opportunities for speculative position-taking as well as for profitable arbitraging, all of which have fed exchange volatility, motivating yet more forex trading.

A decade ago a London banker summarized the dynamic as follows:

A more controversial feature of the new shape of the financial system is that the bulk of its participants now have a vested interest in instability. This is because the advent of the high-technology dealing room has raised the level of fixed costs. High fixed costs imply a high turnover is required for profitability to be achieved.

High turnover tends to occur only when markets are volatile. The analysts at Salomon Brothers…put it clearly. “Logically the most destabilizing environment for an institutional house is a relatively stagnant rate environment” [Walmsley 1988, p.13].

A decade later, a Wall Street risk consultant observes: “When one considers that risk management in the early 1970s consisted almost entirely of the evaluation of credit risk, it is breath-taking to consider the galaxy of risks we track, analyze, and manage today.” The observation is supplemented by a “partial listing” of the galaxy containing 45 different categories of risk [Beder 1997, p.347].

Disconcerting also was the rising incidence of banking and currency crises. An IMF survey reports that during 1980-95 thirty-six of its 181 members had one or more systemic banking crises, and 108 others had one or more periods of “significant banking problems,” defined as “extensive unsoundness short of a crisis” [Lindgren et al. 1996, Annex 1]. These numbers have, of course, risen significantly since 1995. A prominent econometric paper found a strong correlation between the liberalizing of domestic financial markets and the incidence of banking and currency crises [Kaminsky and Reinhart 1996]. The IMF also reports that in a sample of 50 recent currency crises, the cumulative loss of output averaged around 15% of GDP [IMF 1998].

Although the IMF survey reported that three-fourths of the OECD countries had also suffered systemic banking crises or “significant banking problems,” proponents of financial liberalization focused on developing country problems, offering contradictory but equally embarrassingly timed advice on how to integrate successfully with the global financial markets. Following the 1995 Mexican crisis and the ensuing tequila contagion, the World Bank shifted to an evolutionary approach. Its 1997 research report, Private Capital Flows to Developing Countries: the Road to Financial Integration, arrays developing countries along a continuum. At the low end are countries that were early in the process of absorbing capital flows effectively, because they still lacked “a sound macroeconomic policy framework…a sound domestic banking system with an adequate supervisory and regulatory framework, and a well-functioning market, infrastructure and regulatory framework for capital markets.” Developing countries in the early stages should approach foreign capital cautiously, using capital controls to reinforce defenses against sudden surges and withdrawals. Those who have completed the requisites for full financial integration, however, should go for it. Accelerating the movement along this evolutionary path is the increasing skill of international financial markets in assessing developing country payoffs and risks. “Contagion effects of the kind seen after the Mexican crisis are not likely to be long-lasting.” Indeed, “aggregate net private capital flows to developing countries are likely to be sustained in the short to medium term because of the continuing decline in creditworthiness risks and other investment risks, the higher expected returns in developing countries, and the fact that these countries are under weighted in the portfolios of institutional investors [World Bank 1997, pp.2-5,78].

To measure movement along the continuum the report constructed a financial integration index. In 1985-87 only Korea and Malaysia ranked as “highly integrated,” but by 1992-94, 13 developing countries were “highly integrated” and 23 were “medium integrated.”5 However, since three of the highly integrated—Argentina, Mexico and Turkey—had nevertheless suffered major financial crises in the first half of the 1990s, stable financial integration required still other requisites, such as the balanced budgets, high savings rates and export-oriented investment that had enabled the East Asian countries to fend off the “tequila effect” in 1995. Indeed,

The most dynamic emerging [capital] markets, where progress has been particularly intense during the past five years, include most of high-growth Asia (Korea, Malaysia and Thailand, with Indonesia and the Philippines not far behind).

The East Asian markets stand out for their depth and liquidity, and because of efforts undertaken in the 1990s, their infrastructures are now equal to those in Latin America [World Bank 1997, p.59].

Unfortunately for the report’s evolutionary theory, forecasting skills and market timing, all five highly integrated East Asian economies bit the dust as the report reached the bookstores.6 It dropped from sight soon after.The OECD was another victim of mistimed publishing. In contrast to the World Bank, its remedy for the burst of financial crises was to speed up the financial liberalization process.

According to its projections, that would elevate per capita GDP of the “non-OECD world” by 270% by year 2020, compared to only a 100% increase, were the pace not accelerated [OECD 1997]. The report’s optimism relied heavily on the dynamism of the “emerging non-OECD economies…from Asia and Latin America” led by the “Big Five of Brazil, China, India, Indonesia, and Russia” [OECD 1997; preface]
This report, which also appeared as the Asian meltdown was gathering momentum, also faded quickly from circulation.

A recurring obbligato accompanying the crisis-strewn path of financial globalization has been mistaken optimism that improved transparency of information, the successive Basle Accords to tighten prudential bank regulations, and learning-by-doing improvement of lending skills by the lending institutions would stabilize the financial flows. At the 1979 conference on “Financial Crises and the Lender of Last Resort” (papers published as Financial Crises: Theory, History and Policy, Charles P. Kindleberger and Jean-Pierre Laffargue editors, Cambridge U, Press 1982) the paper dealing with rising developing country indebtedness observed optimistically:

Fortunately, the data published by international organizations (BIS, World Bank, IMF), by various national monetary authorities, and by some international banks have been considerably improved in recent years, as part of a deliberate move toward better coverage and understanding of international banking transactions, to help the bankers themselves in decision processes for lending abroad, in particular, in assessing country credit risks….no country has yet been forced into default, and it remains doubtful that this could occur [Metais 1982, pp. 223-225, 232, footnote 11].

Two years later the Third World debt crisis required a concerted bailout to stanch an international banking crisis.

Greater transparency was also the centerpiece of the G-7 response to the 1995 Mexican crisis, which authorized the IMF to establish a Special Data Dissemination Standard that,

“offers countries having, or seeking, access to international capital markets, a voluntary means of providing regular, timely and comprehensive economic data. A key feature of the implementation…will be an electronic bulletin board maintained by the IMF at a World Wide Web site on the Internet” [IMF Survey September 9, 1996, p.290].

Two years later, the Asian crisis led the BIS to observe exasperatedly that “in spite of the ready availability of BIS data showing increasing vulnerability of some of the countries to a sudden withdrawal of short-term international loans, the volume of these loans simply kept on rising” [BIS 1998].

Similarly, each successive Basle Accord to tighten prudential supervision has been a reaction to near global financial crises that exposed deficiencies of the previous accords. The deficiencies reflect the dark side of the skill-enhancing learning process. It has enabled the supervised banks to devise evasive innovations that keep the Basle Committee on Banking Supervision behind the curve.

In reacting to these “anomalies” academic economists have followed two contrary paths. The new open macroeconomics of the 1980s extends the prevailing mainstream obsession with the need to anchor macroeconomics on firm neoclassical “microfoundations” to international trade and finance. The “law” of one price, purchasing power parity and the EMH should prevail in the medium-term, because with the world economy moving ever more closely to free trade and free capital mobility, rational maximizing agents were offered increasing scope for taking positions based on “sound fundamentals.” This implies that relatively stable real exchange rates should prevail.

The other path has been to test these premises and conclusions empirically. These tests, conducted mostly on data from the industrialized countries, roundly reject the conclusions and most of the premises. In a recent survey of the tests, Charles Engel summarizes the results as follows [NBER Reporter Winter 1998/99]:

  1. “The failure of the law of one price accounts for over 90 percent of real exchange rate variations. In many cases it accounts for 98 to 99 percent of the variation.”7 [p.15]
  2. Purchasing power parity can be teased from very long-term data sets (100 years or more), but for shorter intervals within this span, the effects of different monetary regimes dominate real exchange rate volatility. “Generally, when nominal exchange rates are floating, the transitory component of the real exchange rate is highly volatile; when the exchange rate is fixed, the transitory component is very quiescent.” [p.15]
  3. Short and intermediate-term exchange and interest rate dynamics currently are best explained by the Frankel-Froot model [J. Frankel and K. Froot 1990], in which forex trading is dominated by “chartist speculators who do not evaluate investment opportunities rationally, but instead chase trends.” [p.17].

Yet Engel, who has contributed importantly to this critical testing, is still intimidated enough by the neoclassical microfoundations’s restrictive concept of rational behavior to add this cautionary conclusion:

From the modern (1990s) perspective, the shortcoming of the Frankel-Froot model is that it allows irrational herding behavior by economic agents. Additional serious research is needed to understand whether nonfundamental speculation can really drive short-run behavior of exchange rates [p.17].

An essential step toward developing an alternative Minsky-Keynes open economy macroeconomics is, therefore, to anchor it to a view of rational behavior that’s more appropriate to the behavior of the agents who dominate trading in asset markets. This requires disaggregating position-taking in the organized capital asset markets beyond Minsky’s tripartite hedge, speculative and Ponzi behavior, by elaborating Keynes’ beauty contest metaphor of Chapter 12 of his General Theory. Such markets are dominated by market-timing agents, whose short-term trading, financed by bank credit, provides most of the market liquidity. Position-taking by a rational trader must necessarily be based on assessing short as well as long-term determinants of the movement of asset prices within his trading horizon. It would also be irrational for him to assume that his assessment of each determinant, and his trading horizon, are identical to those of other traders. His trading response to news affecting fundamental determinants requires, therefore, that he also assess the likely response of other traders, in the knowledge that those responses also include an assessment of how he will respond.

Since a priori deductions of the state of other traders’ expectations involves an infinite regress into subjectivity, rational traders must resort primarily to inductive reasoning. There is no way for them to validate their expectational hypotheses other than by applying them and observing the results. Inductive reasoning is a rational decision process that precludes maximizing decision making. Heterogeneous traders inductively arriving at a common set of expectations would be a special case, based not on reaching general consensus on the “true model” of how fundamentals determine equilibrium prices, but on a confluence of judgments about likely reactions of traders to news about variables that impact short and long-term expectations, Such equilibria are likely to be unstable, producing asset price bubbles and crashes.

The conditions for an expectational equilibrium to emerge among heterogeneous traders is being explored through non-linear dynamic (chaos theory) modeling.

Mimicking markets made up of heterogeneous traders with varying beliefs and feedbacks requires models that are too complex for determinate solutions, but allow numerical experimentation. Brian Arthur and his Santa Fe Institute colleagues report the following results of their experiments [Arthur et al 1997]:8

We find that if our agents very slowly adapt their forecast to new observations of the market’s behavior, the market converges on a rational expectations regime. Here ‘mutant’ expectations cannot get a profitable footing….Trading volume remains low. The efficient market theory prevails.

If, on the other hand, we allow the traders to adapt to new market observations at
a more realistic rate, heterogeneous beliefs persist, and the market self-organizes into a complex regime. A rich ‘market psychology’—a rich set of expectations—becomes
observable. Technical trading emerges as a profitable activity, and temporary
bubbles and crashes occur from time to time. Trading volume is high, with times of
quiescence alternating with times of intense market activity. The price time series
shows persistence in volatility…and in trading volume….individual behavior evolves
continually and does not settle down [p.301].

An expectational equilibrium, it must be emphasized, merely means a convergence of trader expectations about asset prices. The inference that they are guides to the optimal allocation of resources in the real economy would be unwarranted. George Soros’ concept of reflexivity similarly stresses the self-referential formation of financial market expectations in his critique of the EMH [Soros 1994]. The inference that is warranted is that the neoclassical microfoundations are a poor basis on which to erect macroeconomic theory, whether open or closed.

The FIH gives direction to the above taxonomy. Financial markets become progressively more active during self-reinforcing runs of optimistic expectations,
sustained by the increasing willingness of banks to fund leveraged position-taking by
speculating traders. But the effect on new investment and credit risk according to the closed economy FIH has to be broadened in an open economy version to incorporate
exchange rate and other risks generated by free capital mobility, because these impact not merely the level but also the composition of investment, That is, the increasing volatility of interest and exchange rates raises the hurdle rate, which tilts investible funds toward projects with faster expected payoffs.9 Perceptions of credit risk may continue to decline, but a rising hurdle rate will concurrently steer investible funds toward shorter gestation projects: toward mergers and acquisitions rather than greenfield construction, and toward increasing “stockholder value” via share buybacks, and speculative financial forays. The declining growth rates of productivity and real GDP in the OECD countries that have accompanied the shift to floating exchange rates and the lifting of capital controls appear to reflect this dynamic.

Thus an increasing share of resources has been drawn to activities that supply liquidity and transfer ownership and risk. From the mid-1950s on, the share of GDP in each of the G-7 countries devoted to Finance, Insurance, and Real Estate (FIRE) has risen almost monotonically. Until the mid-1970s, the rising FIRE/GDP ratios were paralleled by rising real growth rates of non-financial goods and services, supporting the conventional view that financial deepening promotes real growth. Since then, however, the real growth of the non-financial sectors of each of the G-7 has fallen off even more than has real GDP growth, suggesting that the post-Bretton Woods rise of FIRE/GDP has been crowding out non-financial growth [Felix 1996; Charts 1-7]. Other data show that the share of the OECD labor force employed in finance proper rose 21% higher and the share of OECD investment in finance rose 104% higher in 1980-93 over their 1970-79 averages [Edey and Hviding 1995; Table 2]. Since 1975 financial services has been the fastest growing component of international trade, rising at 13% per annum, while FDI in financial facilities led the overall growth of FDI in services during the 1980s [OECD 1994, pp.38-40].

In sum, the claim that major welfare gains have ensued for both the industrial and developing countries from decontrolling capital markets has been, in Bhagwati’s trenchant phrase, “banner waving.” [Bhagwati 1998]. Instead of citing empirical support that such gains have ensued, the claimants have been tautologically trumpeting their theoretical claims as a posteriori proof.10

The most vulnerable participants in the globalizing financial system, the developing countries with their thin financial markets and more limited technological and managerial flexibility, have tried to strengthen defenses against currency runs by building up forex reserves. In 1997 they held 55% of global official reserves while doing less than 25% of global trade. With the dollar as the chief vehicle currency for trade and capital flight, a complex but unstable symbiosis has emerged between the U.S., the developing countries, and the rest of the OECD. Thus far it has benefited the U.S. economy at the expense of the others, but its dynamics include adverse feedbacks that are likely over time to erode the U.S. gains.

The U.S. benefits to date extend well beyond seignorage gains, which most estimates put at between 0.5 and 1.0 percent of U.S. GDP.11 The collective response of developing countries to their contagious currency crises has been to increase their desired reserve levels and to try to reach these levels by intensifying their exporting to the industrial countries, which has been deflating prices for imported consumer goods and industrial materials. However, because of the premier position of its currency, the U.S. has been able to export the dollar at will in exchange for these imports, i.e., run increasing trade deficits without being forced to raise its short-term interest rate to deter capital flight. Were more developing countries to shift in desperation to currency boards or, as in the case of Argentina, from currency board to complete dollarization, they would be further increasing the capacity of the U.S. to fund rising trade deficits. That is, the incessant demand for more dollar reserves by developing countries to protect against currency crises keeps overriding the corrective mechanism of conventional analysis, in which increasing foreign liabilities should limit the size of U.S. trade deficits, because foreign holders become unwilling to hold more dollars except at higher dollar interest rates. The other industrial countries, on the other hand, while benefiting from the improved terms of trade, have had to pay for their cheapened imports with exports and higher short term real interest rates.12

The dark side for the U.S. is that its dollar exporting is deepening a “Dutch disease” dilemma. U.S. residents whose income and wealth comes from ownership of financial assets, or who are employed in skilled positions in the non-traded goods sector, have garnered the lion’s share of the benefits. Those in the traded goods sector, on the other hand, have suffered losses of high productivity manufacturing and primary sector positions and an out-migration of labor to low wage service sector jobs. The result is a
resurgence of Wall Street-Main Street tensions over monetary and trade policy with interesting implications for the current debates over reforming the “architecture” of the global financial system.

Also threatening the favorable U.S. dynamics is the emergence of the euro as a potentially major alternative vehicle currency, and the diverging positions between the U.S. and most of the other G-7 on financial crisis management. Washington is encountering increased difficulty getting the other G-7 countries to keep contributing to the IMF bailouts and to acquiesce to its hands-off position on floating exchange rates and
free capital mobility.

Finally, the industrialized countries, most of all the U.S., have been basking in asset price trends that, as per the FIH, appear unsustainable. Since 1982 real interest rates on 10-year government bonds of each of the G-7 have averaged around twice their Bretton Woods averages [Felix 1997/98: Table 7]. Capital decontrol appears to account for most of the difference. That is, in the Bretton Woods era, when capital controls were
in place in most of the G-7, the only easy options open to holders of long bonds anticipating inflation from a credit-easing policy, were to shift to shorter-term bonds or to equities. Both moves tended to reinforce the policy goal of bringing output and employment closer to capacity. But with the capital decontrol of the 1980s, quick, easy movements by institutional investors between domestic and foreign bonds and equities,
and covered and uncovered interest arbitraging by banks and hedge funds, countered efforts to lower real interest rates, short and long. The U.S. has been only a partial exception. The reserve currency dominance of the dollar has allowed the Fed greater scope for lowering short-term real interest rates than has been permitted other G-7 central banks, but that advantage has not extended to long-term real rates.

The high long-term real rates presage a deepening of the current globalizing crisis. From the early 1980s on, they have been exceeding GDP growth rates by a rising percentage in each of the G-7. In the past decade, interest rates on 10-year governments have averaged more than double the GDP growth rates. The only historic parallel for this is the inter-war era, with the depressed 1930s accounting for most of the GDP growth shortfall. By contrast, during the pre-WWI Gold Standard era real interest and real GDP growth rates were equivalent [Felix 1997/98: Table 9]. With debt expanding faster than GDP since the early 1980s, the rentier share of G-7 income has been rising persistently.

High real interest rates should deter investment, but they have merely held back real not financial investment, as is evidenced by the explosive growth of M & A and equity prices. Capital’s overall share of national income has thus been rising, and since bonds and equities are mostly held by the top income decile, household income and wealth concentration has also been rising. Capital’s share can’t reach 100%. But stabilizing speculation seems far less likely to bring about a smooth asymptotic leveling of the share than are collapsing asset bubbles and political backlashes to terminate this open economy manifestation of the FIH in a hard landing, approximating–hopefully not too closely–that which terminated the 1920s asset price boom.

Reforming the “Architecture” of the Global Financial System

So is it adios EMH and bienvenido FIH? Not quite. The need to reform the “architecture” is now generally acknowledged, as is the need to reduce the volatility of short-term capital flows and the excessive reliance of developing countries on short-term external financing. But EMH thinking still imbues mainstream reform proposals, while Minsky’s closed economy policy advice for thwarting financial crises needs adaptation toopen economy conditions.

Washington and the IMF now include proposals to improve risk assessing by the major financial markets and to improve bank supervision, along with a litany of reforms directed at developing country financial management [Cf. Group of 22 Reports 1998].

They have also quietly suspended their twin crusades to universalize the adoption of capital decontrol and the Mutual Agreement on Investment (MAI). However, the premise that the freedom of capital to move globally is a major public good remains intact. The intent is to resume the two campaigns when the current crisis has subsided.

The proposals for improving risk assessing and bank regulation single out the same targets—inadequate information and transparency, better value-at-risk bank procedures— that successive architectural reforms since the first Basle Accord have aimed at. That this time they’ll finally get it right presumes that the EMH can finally be validated.

The proposals, however, bring to mind the old vaudeville interchange between two drunks fighting off imaginary leprechauns. “Close the door! They’re comin’ through the window! Close the window! They’re comin’ through the door!” That is, proposals to reduce excessive risk-taking by banks and institutional investors would increase contagion, while those that might reduce contagion would increase bank and
investor risk.

The value-at-risk (VAR) models used by banks to lessen the riskiness of their proprietary trading, hedge fund financing, and customized derivative mongering, are charged with not only encouraging excessive risk-taking by the banks, but also with intensifying contagion effects [Cf. Folkerts-Landau and Garber 1998]. By relying on backward-looking variance-covariance matrices and normal risk distributions they tended to underestimate the probability of large losses from taking long and short asset positions (the flaw that bankrupted the Long Term Asset Management hedge fund). Contagion was intensified because a volatility event in one country automatically generated an upward re-estimate of credit and market risk in a correlated country, which triggered automatic margin calls and tightening of credit lines in both countries. Such risk control methods help explain why Malaysia’s capital controls and Russia’s default produced a widespread cutoff of lending to developing countries. Tightening VAR methodology to lower risk-taking by banks is likely to strengthen contagious reactions.

Bond rating agencies are also caught between conflicting goals. They have been criticized for down-grading Asian bonds too late to alert investors pre-crisis, and then for “reactive downgrading of Asian sovereign ratings from investment grade to ‘junk status,’ [which] reinforced the region’s crisis…by forcing institutional investors who are required to maintain investment-grade portfolios to offload Asian assets. In response the rating agencies, having begun downgrading Latin American assets because of contagion risks rather than solely because of deteriorating fundamentals, are being accused of thereby reinforcing global crisis contagion” [Reisen 1998, p.19].

Conversely, a recent OECD policy brief [Reisen 1998] offers two proposals to reduce contagion that would surely increase investor risk. One is to remove investment grade requirements for pension funds and other bond-holding institutions and force them “to rely on their own judgment, rather than moving like herds on rating signals.” The other attacks the 1988 Basle Accords for assigning only a 20% risk-weight to bank loans of less than a year, and a 100% risk-weight to longer-term loans. This biases banks to lend short-term to developing countries and to engage in excessive inter-bank lending.

The policy brief proposes removing the “distortion” by equalizing the risk-weights. But the weights were designed to correct the excessive maturity mismatching between their short-term liabilities and the medium-term loans to developing countries that had brought major international banks to near insolvency in the early 1980s debt crisis; which proves that in finance one man’s “distortion” is another’s “correction.”

Improving risk assessment by requiring more timely and accurate data about foreign borrowers is another proposal that’s unlikely to prevent herd behavior by lenders.

Prior to the Asian crisis, “in spite of the ready availability of BIS data showing increasing vulnerability of some of the countries to a sudden withdrawal of short-term international bank loans, the volume of these loans simply kept rising” [BIS 1998]. This was in part because banks were securitizing their loans and then marketing the securitized bonds, shifting the credit risk to the bondholders. Securitizing also removed loans from bank balance sheets, enabling them to evade the risk-equity requirements of the 1988 Basle Accords and leverage a larger volume of loans from their equity. But diverse bondholders are more prone to herd behavior than are large banks. As Wall Street economist John Lipsky observes, “in a world of mobile, securitized capital, there is little likelihood that the IMF staff will be able to construct a credible stabilization program, including the needed structural reforms under crisis conditions in a matter of days” [Lipsky 1998].

Thus when market nervousness sets in, the timely publicizing of negative information is likely to exacerbate panicky withdrawal and contagion. Fear of such a reaction dissuaded the U.S. Treasury and the Fed from publicizing their adverse assessments of Mexico’s financial health until after the crisis broke out [Wessel et al. 1995].

All this fits the FIH view that financial market dynamics are inherently too unstable to be left alone after a one-time fix. Minsky, however, couched his stabilization advice in a closed economy setting. He assumed a single central bank that could effectively intervene as lender of last resort (LOLR) and a large public sector with a progressive tax structure and expenditure commitments that would allow automatic fiscal stabilizers to set a high floor under aggregate demand. His “anti-laissez-faire theorem,” an in-your-face rejection of the EMH’s contention that “policy surprises” are the main destabilizers of market behavior, also requires an activist government able to impose timely new “thwarting mechanisms.” [Ferri and Minsky 1992].13 Adapting these apercus to a global setting of decontrolled financial markets with no global LOLR, and national economies with varying policy goals, is, however, a complex exercise in political economy. Barry Eichengreen splits the current spate of architectural reform proposals in two groups: those that are “singularly unrealistic” and those that are “singularly unambitious.” In the first group he places—justifiably in my view—proposals for an international central bank to act as global prudential overseer and LOLR, an international bankruptcy court to settle debt conflicts, and other visionary schemes that demand
massive institutional and political transformations to become feasible. In the second group he puts mainstream proposals, such as cited above.

Escaping this depressing taxonomy, however, may be collective action shaped by the FIH, for a minimalist reprise of Bretton Woods. Recall that the Bretton Woods system was able to reconcile national and global stability needs fairly well for a quartercentury, facilitating, by most welfare criteria, “the Golden Age of Capitalism.” The conditions that accounted for its success—capital controls, a United States with the capacity to act as LOLR to the capitalist world, and Cold War anti-Communism as a motivating ideology—have since dissipated. But a modest approximation of Bretton Woods compatible with today’s changed conditions is technically, and may be becoming politically, feasible. The approximation requires implementing two interrelated reforms of the global financial architecture. One is a Big Three agreement to reduce exchange rate volatility by bounding the cross-rates between the dollar, euro and yen within a target
zone, with the other economies left free to tie their currencies tightly or loosely as they see fit to one of the three reserve currencies. The second, directed at weakening the capacity of financial markets to break up band arrangements, is a collective agreement to tax global forex transactions along the lines of the Tobin tax proposal.

Bounding the Big Three currency fluctuations provides a looser equivalent of the fixed dollar-gold price that had anchored the Bretton Woods adjustable peg system. To be effective, the Big Three would have to intervene jointly in the forex market to keep exchange rate fluctuations within the target zone. With open capital markets they would also have to subordinate other monetary-fiscal policy goals to the task. But the ease with which rampaging capital flows broke up the 1987 Louvre target zone agreement and the
ERM makes clear that protecting a Big Three target zone from such rampages is essential. A global Tobin tax could not only perform this task, but could also substantially reduce the collective coordination of monetary-fiscal policies required to sustain the target zone.

Tobin’s proposal for an international agreement to tax forex transactions at a small, uniform rate offers a “market friendly” way of deterring capital market rampages.

Instead of pointy or round-headed bureacrats trying to screen out hot money flows under a direct capital controls system, the tax leaves the screening to the markets. Around 80% of the $1.5 trillion global forex transactions per trading day are legs of round trips of a week or less. Most relate to arbitraging and open speculating by currency dealing banks, investment houses, hedge funds and multinational corporations, seeking to profit by taking large short-term positions to exploit small, transitory margins. A small tax on all
forex transactions would cut heavily into these margins and return on capital. It would impact negligibly the return on capital from international trade and FDI, since these involve much longer round trips and much higher profit margins per round trip.

Moreover, the tax on trade and FDI forex transacting would be compensated by reduced exchange risk and hedging needs attendant on more stable Big Three cross-rates.

The tax would help stabilize exchange rates in two additional ways. The tax revenue would substantially increase the resources available to the monetary authorities to counter-speculate in the forex markets. And reducing currency arbitraging would lessen the macro-policy coordination needed to sustain the target zone arrangement. The last is because the tax widens the interest rate differentials across currencies required to make arbitraging profitable. Indeed, the increased scope that the tax would provide national economies to implement full employment and other welfare goals without being immediately sandbagged by anticipatory capital flight is what originally motivated Tobin to propose the tax. By slowing the reaction speed of the globalized financial markets, the tax would allow welfare oriented policies more time to manifest results.
The tax effects vary non-linearly with the size of the tax, the response elasticities, and enforcement leakages. A recent set of conference papers sponsored by the United Nations Development Programme (UNDP) produced some converging of views concerning each of these three effects [Ul Haque et al. eds.1996]

  1. A tax of 0.1% on global forex transactions applied to the 1998 volume would produce between $180 and $220 billion revenue per annum, and a one-time drop of forex volume of from 13% to 49%, the variation reflecting different assumptions about pretax transaction costs and response elasticities.14 Almost all would impact short-term trading. For arbitraging strategies involving round trips each trading day the annualized tax would be 48%, while for international trade involving a 90 day financial trip, the annualized tax would be 0.8%
  2. Universal agreement would not be necessary to implement the tax. The U.K., the U.S., Euroland and Japan account for around 80% of global forex turnover. Bringing in Switzerland, Singapore and Hong Kong would raise the coverage to 91%. The remaining countries could be brought on board in one fell swoop by making joining a prerequisite for IMF loans.
  3. The tax should be levied on forwards and swaps as well as spot transactions, but how to tax customized derivatives effectively remains to be answered.
  4. To minimize offshore evasion, the tax should be levied at dealing rather than booking or settlement sites. Global forex dealing is dominated by a few dozen large financial houses, most of them headquartered in London and the Big Three. Their dealing rooms employ expensive equipment and talent. Moving dealing rooms as distinct from booking or settlement offices to tax free sites would be very costly. Doubling the tax when one of the counterparty is domiciled in a tax free location would be an effective deterrent. At least two financial houses would then have to move their expensive dealing operations concurrently to tax-free sites for evasion through relocation to work [Cf. Kenen 1996].
  5. Applying the tax to all instruments that have liquid, high volume markets, such as cross-currency treasury bill swaps, would minimize the payoff from shifting to nontaxed instruments. But since “financial engineers” would doubtless try to devise synthetic instruments to fit the bill, the tax agreement would need a supervisory body to oversee tax implementation and to recommend new “thwarting” changes as needed [Garber 1996; Kenen 1996]. However, gaming between financial authorities and financial innovators also plague the conventional proposals to improve the “architecture” of the global financial system, so is no basis for a priori dismissal of the Tobin tax.
  6. Because the tax would be collected by national tax authorities, the size of the tax revenue collected by the participating nations would differ enormously. The collective agreement to tax would also have to include an understanding on the allocation of the revenue. How much should be centralized? How much of the central fund should be devoted to a global LOLR function, and how much for projects in the developing countries, are distributive issues that the negotiators of the agreement would have to address.
  7. Finally, while the tax is primarily a crisis deterring device, allowing member countries individually or in concert to raise the tax rate above the uniform rate when under siege, could ameliorate crises by impeding capital flight and contagion, and with less reliance on interest rate spiking and demand-depressing measures to allay the currency runs.

Opposition from Washington renders nil the immediate prospects that reforms along the lines of this minimalist reprise of Bretton Woods will be taken up at the IMF, the G-7, or other official policy forums. The attempt by France, Germany and Japan to put a Big Three target zone proposal on the agenda of the recent G-7 ministerial meeting in Bonn was slapped down peremptorily by the U.S. delegation. The Tobin tax hovers like Banquo’s ghost over the G-7 and IMF conference tables. Indeed, Washington even suppressed the attempt by the UNDP to promote its aforementioned volume of conference papers on the tax [Le Monde Diplomatique, February 1997, “Le projet de taxe Tobin, bete noire”].

Political dynamics could, however, improve the medium-term prospects for the two proposals. The heightened priority that Euroland governments are giving to job creation while protecting the welfare state, will require protecting the euro against currency runs. Despite Washington’s opposition, European pressure for collective action to bound the Big Three cross rates is therefore likely to persist. While still off the table at
the governmental level the Tobin tax is, surprisingly, picking up grass roots support. A coalition of NGOs, academics and unions have succeeded in getting the Canadian House of Commons on March 23 to pass a bill by a 2 to 1 majority stating “That in the opinion of the House, the government should enact a tax on financial transactions in concert with the international community.” ATTAC, a movement of similar composition, has been gathering considerable support in France, and is spawning sister movements in other
Euroland countries.

 Economic logic, if not grass roots pressure, is pushing in a like direction in Japan. With its short-term interest rate locked in a liquidity trap, the government has been attempting to revive aggregate demand by monetizing a very sizeable increase of its fiscal deficit. The effort is threatened, however, by a flight from longer-term bonds that’s pushing up longer rates and increasing exchange rate volatility. The higher long rates depress aggregate demand directly and further weaken the fragile balance sheets of Japanese banks, while volatile exchange rate movements could heighten trade tension with the U.S. and even force Asian countries into another round of devaluation. Hence Japan’s support for bounding the Big Three cross rates remains strong, with Finance Minister Miyazawa almost dropping the second shoe by announcing his support for “market friendly” regulation of capital flows. [Reuters dispatch, March 1, 1999].

No comparable grass roots Tobin tax movement is yet evident in the U.S. But the persisting global crisis and the U.S. role of global consumer of last resort is reviving Main Street-Wall Street tensions. A widening array of import-competing activities with political clout is demanding import protection. Washington’s attempt to ride both its high horses—free trade and free capital mobility—is becoming politically precarious.

Concern that the momentum is with Main Street is evoking fearful memories of Smoot-Hawley among academic and media pundits. Will this persuade Washington to accept constraints on Wall Street in order to save free trade, or will it fall between the two steeds trying to accommodate both? Given the current level of Washington statesmanship, the odds favor the second. They could, however, shift to the first, were more mainstream economists to give up their addiction to the EMH, thereby depriving the case for free capital mobility of its intellectual cover.

References

ARTHUR, W. Brian, John H. HOLLAND, Blake LE BARON, Richard PALMER, Paul TAYLOR 1997 “Asset Pricing Under Endogenous Expectations in an Artificial Stock Market,” Economic Notes, vol. 26, no.2 Banca Monte dei Paschi di Siena. pp.297-330.
BANK FOR INTERNATIONAL SETTLEMENT 1998, 68th Annual Report, Basle, Switzerland
BEDER, Tania S. 1997, “What We’ve Learned About Derivatives Risk in the 1990s,” Economic Notes, vol.26 no.2, Banca Monte dei Paschi di Siena, pp.337-356.
Bhagwati, Jagdish 1998 “The Capital Myth,” Foreign Affairs, vol. 77 no.3, pp.7-12
DIXIT, Avinash 1992, “Investment and Hysterisis,” Journal of Economic Perspectives, Winter, vol. 6, pp.107-132.
EDEY, Malcolm and Ketil HVIDING 1995, “An Assessment of Financial Reform in OECD countries,” OECD Economic Studies No. 25, Paris.

EICHENGREEN, Barry and Charles Wyplosz 1993, “The Unstable EMS,” Brookings Papers on Economic Activity, vol.1, no.1, Washington, D.C., The Brookings Institution, pp.51-143
ENGEL, Charles M. 1998/99, ‘Exchange Rates and Prices,” NBER Reporter, Cambridge, MA, National Bureau of Economic Research. Winter.
FELIX, David 1997/98, “On Drawing General Policy Lessons From Recent Latin American Currency Crises,” Journal of Post Keynesian Economics,” vol.20, no.2, Winter.
FELIX , David 1996, “Financial Globalization versus Free Trade: the Case for the Tobin Tax,” UNCTAD Review 1996, Geneva, United Nations Conference on Trade and Development, pp.63-104.
FELIX, David and Ranjit SAU 1996, “On the Revenue Potential and Phasing in of the Tobin Tax,” in Ul Haque et al. op. cit., Chapter 10.
FERRI, Piero, and Hyman P. MINSKY 1992, “Market Processes and Thwarting Mechanisms,” Jerome Levy Institute Working Paper No. 64.
FOLKERTS-LANDAU, David and Peter GARBER 1998, “Capital Flows From Emerging Markets in a Closing Environment,” Global Emerging Markets vol.1 no.3, London, Deutche Bank Research, pp. 69-83.
FRANKEL, Jeffrey 1996, “How Well Do Markets Work: Might a Tobin Tax Help? In Ul Haque et al. op. cit., Chapter 2.
FRANKEL, Jeffrey and Kenneth FROOT 1990, “Chartists, Fundamentalists and the Demand for Dollars,” in A. Courakis and M. Taylor eds., Private Behavior and Government Policy in Interdependent Economies, Oxford, Clarendon Press.
FRIEDMAN, Milton 1953, Essays in Positive Economics University of Chicago Press.
GARBER, Peter M. 1996, “Issues of Enforcement and Evasion in a Tax on Foreign Exchange Transactions,” in Ul Haque et al. op. cit., Chapter 5.
GROUP OF 22 1998, Reports of the Working Groups on: Transparency and Accountability, Strengthening Financial Systems, and International Financial Crises, Washington, D.C., International Monetary Fund.
HELLEINER, Eric 1994, States and the Resurgence of Global Finance: From Bretton Woods to the 1990s, Ithaca, NY, Cornell University Press.
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KAMINSKY, Graciela and Carmen REINHART 1996, The Twin Crises: The Causes of Banking and Balance of Payments Crises, International Finance Discussion Paper No. 544, Washington, D.C., Board of Governors of the Federal Reserve System.
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KINDLEBERGER, Charles P., and Jean-Pi

David Felix,
Washington University in St. Louis


Presented at the 9th Annual Hyman P. Minsky Conference on Financial Structure,
Jerome Levy Economics Institute,
April 21-23, 1999.


Introduction: When Theory Matters


In the 1930s mainstream economists reacted to the deepening crisis by abandoning the policies that derived from their macroeconomic theory, but without abandoning the theory. To quote Minsky:
Keynes’ novelty and relative quick acceptance as a guide to policy were not due to
his advocacy of debt financed public expenditure and easy money as apt policies to
reverse the downward movement and speed recovery during a depression. Such
programs were strongly advocated by various economists throughout the world. Part
of Keynes’ exasperation with his colleagues and contemporaries was that their
policies did not follow from their theory [Minsky 1982: p.97].
Did this matter? Yes. As the post-WW II recovery took hold, various aspects of pre-1930s mainstream macroeconomic theory emerged from the closet to provide the theoretical rationale for a progressive whittling away of Keynesian policies. The notion that the self-adjusting properties of capital markets will move capitalist economies back to full employment-full capacity growth paths reappeared in various guises.

The Great Depression was reduced to an aberration, the result of a worst case mix of bad policies that was unlikely to be repeated. Keynes had managed to get permanent acceptance of capital controls included in the Bretton Woods Articles of Agreement, a task greatly facilitated by the fact that Article VI legitimized controls already in place in most of the participating countries.1 But with the post-war recovery the controls and the Bretton Woods pegged exchange rate system itself came under increasing attack from Chicago for distorting resource allocation rather than correcting market failures.2 Concurrently, the Neoclassical-Keynesian synthesis had refocused attention from the financial to the labor market as the fundamental source of cyclical instability. When a resurgence of speculative capital flows in the late 1960s threatened the pegged exchange rate system, it was intellectually facile for proponents of the synthesis to buy into the Chicago solution of flexible exchange rates and capital decontrol. By the early 1970s mainstream economists had reassumed most of the basic tenets and policies of their laissez-faire predecessors that Keynes had attacked.

Ironically, what had become the heterodox branch of Keynesian economists, with their perception of capitalist dynamics as crisis prone, won most of the post-war theoretical debates with their neoclassical-synthesis opponents. The capital theory controversy destroyed the validity of marginal productivity as the basic determinant of factor shares in an economy with heterogeneous capital, thereby undermining an essential component of the alleged self-adjusting properties of a capitalist economy. Minsky’s financial instability hypothesis (hereinafter the FIH) further undermined the neoclassical claim that full employment was the unique rest point of long-run market dynamics. It emphasized that multi-period financial commitments linked to the construction and exchange of capital assets whose income streams are uncertain, necessarily cause the long-term growth path of laissez-faire capitalism to be path-dependent and crisis prone, in which periods of stable, full employment growth tend to self-destruct.

But the debate took place during the “Golden Age of Capitalism,” an era of unusually rapid and stable growth of output, employment, productivity and real wages.

The industrialized countries were behaving as if stable full employment growth was the norm, rather than the exception, and economists had begun asking whether the business cycle was now obsolete. The heterodox may have won the theoretical debates, but factually their victories could be dismissed by the vanquished as small beer. Minsky could write about debt deflation and single out potential post-war crises that had been aborted by timely Fed interventions. But by the end of the 1970s even he was persuaded that “It” would not happen again, because big government and built-in stabilizers were a permanent feature of post-war capitalism that would act as an effective buffer against systemic liquidity crises and debt deflation. [Minsky, 1982].

So mainstream economists lauded the replacement of the Bretton Woods pegged exchange rate system in the 1970s by floating rates, persuaded that rapid rate adjustments would now abort currency speculation, and allow more national autonomy over macroeconomic policies. They hailed the progressive lifting of capital controls and the ensuing explosion of international financial flows in the 1980s as advancing the efficient allocation of global resources. The IMF, with assists from the World Bank, the OECD and regional development banks (collectively, the IFIs), began pressuring developing countries to “get prices right” by liberalizing imports, floating the exchange rate, lifting “financial repression” and capital controls, privatizing state assets, and adopting “sound” monetary-fiscal policies. Article VI, still part of the IMF’s charter, became an embarrassment, since the IMF was honoring it in the breach. It began campaigning in the 1990s to get the article replaced by one requiring all IMF members to commit to full capital decontrol.

Results have fallen well short of expectations. Real as well as nominal exchange rate volatility have kept increasing, as has currency speculation. The incidence of systemic bank and balance of payments crises with serious international repercussions have become more frequent, and most economies have fallen into a prolonged post-Bretton Woods growth slowdown. For a time the proponents comforted themselves that the fault lay in the implementation, not the strategy; governments needed simply to accelerate market liberalization and get the sequencing right. Proponents also took comfort from the volatility of the expanding capital flows. It meant that the financial markets were doing double duty. They were not merely allocating more global resources in efficiency enhancing directions, but were also moving the liberalization process along by rewarding “sound” policies with capital inflows and punishing “unsound” policies with capital flight.

However, long before the current international crisis broke out, “sound” policies began losing substance. In the so-called “first-generation” of crisis models, capital flight occurs because the government is trying to sustain excess aggregate demand that is spilling over into a growing import surplus, by using capital controls to protect an increasingly overvalued exchange rate. Financial capital, recognizing the fragility of the effort, begins exiting the currency through evasive channels. This drains official reserves, which opens the floodgates for an all-out speculative attack [Krugman 1979]. Eliminating excess demand by tighter monetary-fiscal policies and lifting capital controls would allow the exchange rate to settle at a speculation-free equilibrium. These measures formed the core of the “sound” policy set on which the IMF conditioned its credits. But in the context of open capital markets, floating rates had undesirable feedbacks on the price level and on capital flows. Latin American countries, beset by near hyper-inflation in the aftermath of their 1980s debt crisis, shifted, with IMF acquiescence, to pegging or semi-pegging the nominal exchange rate to anchor the price level, which meant overvaluing the real rate, that is, “getting prices wrong.”

Encouraging larger capital inflows—a major desideratum of the IMF—reinforced its acceptance of pegging the nominal exchange rate. The IMF continues to insist on “sound” exchange rate policy, but in the past decade it has been “talking the talk” without being sure which way to “walk.”

Balancing the budget, and raising interest rates, other major components of the “sound” policy package, have also been sandbagged by events. The speculative attack which broke up the semi-fixed Exchange Rate Mechanism (ERM) of the European Monetary System in 1992-93 succeeded in forcing devaluation on countries that had neither an unduly large current account nor fiscal deficit [Eichengreen and Wyplosz, 1993]. The event popularized “second generation” multiple equilibria models among academic economists, in which governments give in and reward the currency speculators with a depreciated exchange rate that reduces economic welfare because the economic and political costs of defending the existing rate against the speculative onslaught have become too high.3

The IMF, however, persisted resolutely in making monetary-fiscal austerity the centerpiece of its “sound” policy set through the first year of the Asian crisis. Since then, under attack from a growing segment of mainstream economists for needlessly worsening the Asian crisis, and fearing political upheavals, the persistence has become less resolute.

In Thailand, Indonesia, and Korea, the IMF eased up in the second year and allowed substantial fiscal deficits in order to reverse declining aggregate demand, though that reflects a tactical adjustment rather than a doctrinal epiphany.4 The current bailout packet for Brazil is conditioned on fiscal austerity and higher interest rates.

The essence of the criticism of the IMF, is echt Minsky FIH [Kregel, 1998], although most mainstream defectors dare not mention the name. The IMF has been severely worsening matters by applying “first generation” corrective policies—high interest rates and fiscal austerity—to situations where the immediate need was to minimize debt deflation by sustaining liquidity and aggregate demand and getting creditors to roll over loans and extend debt servicing while most of the indebted domestic firms and banks still had positive present value. Instead, the IMF policies produced interest rate spikes, credit crunches, and collapsing aggregate demand that maximized debt deflation, forcing a high proportion of the domestic firms and banks to become Ponzi units, i.e. insolvent.

With the Asian crises worsening Japan’s and spreading to other regions, “there is, in short, a definite whiff of the 1930s in the air.” [Krugman 1999; p.58]. “It” may indeed be happening again. Krugman’s recent essay is especially interesting because his assessment of, and policy prescriptions for, the unfolding crisis, Minskyish in all but name, are at odds, as he candidly admits, with the neo-classical-Keynesian synthesis to which he still adheres. It raises again the question, if the policies are appropriate does it matter if the theory is not?

Again the answer is yes. Krugman sees the 1990s “It” as merely another anomaly rather than a systemic phenomenon. Emergency measures are required: developing countries should adopt capital controls; Japan, caught in a liquidity trap, should try harder to inflate; other industrial countries should avoid the liquidity trap and minimize debt deflation by reorienting monetary policy to low inflation rather than price level stability.

But the long-run still belongs to the neoclassical-Keynesian synthesis plus the Philips Curve, although with free capital mobility also a long-run desideratum, the “impossible trinity” limits the feasible exchange rate choices to either floating or forming currency unions within optimum currency areas. Thus while Krugman’s prescription for the current crisis is heterodox, his perspective on longer-term reform of the “architecture” of the international financial system in order to minimize the recurrence of future “Its” remains largely shaped by orthodox notions about capital market dynamics that are at odds with the FIH and its policy implications.

A fundamental implication of the FIH is that without restrictions on capital market dynamics neither exchange rate choice is a barrier against crises. Minsky, however, placed his FIH theorizing and policy implications in a closed economy setting.

Does free capital mobility reinforce or undermine its insights? I contend that it reinforces the relevance of the FIH, but weakens the relevance of the major policy inferences that Minsky drew from it. Nevertheless, a weaker set of stabilizing policies compatible with the FIH may be technically and politically feasible, despite constraints of national sovereignty and the heterogeneity of the world economy. The remainder of this paper elaborates on these contentions.

The Financial Instability Hypothesis vs. the Efficient Market Hypothesis in a World of Open Capital Accounts


At first glance, a world of open capital accounts appears to undermine the relevance of the FIH. Unless all countries are simultaneously in the fragile phase of their domestic FIH, those in that phase should by raising interest rates sufficiently be able to abort incipient credit crunches and debt deflation by drawing in capital flows from countries in the more robust phase of the FIH. But the FIH also holds that the fragile phase is the outcome of increasing leveraging by both borrowing firms and lending banks, and ebullient overvaluation of capital assets by the equity markets which deteriorates the quality of loan collateral. The liquidity squeeze that ensues and brings on a financial crisis is due to a sharp upward reassessment of lender risks. An inflow of
foreign finance that aborts the crisis therefore implies that foreign lenders disregard this reassessment.

The case for opening capital accounts globally rests on micro-foundations that validate such disregard. The inflows are normal responses because financial markets, absent regulatory distortions, behave efficiently. They are composed of rational wealth maximizing entities who therefore strive to process correctly all available information about the fundamental factors that determine the yields and risks of loans and of the
capital assets that collateralize the loans. Lenders operating in a lower interest rate environment will always be attracted to higher interest borrowers, provided the interest spread is high enough to incorporate the lender’s correctly assessed risk premium.

Lifting capital controls merely extends these efficient market dynamics to the global economy. The FIH is inapplicable not only to open economy financial relations but to closed economy ones as well.

Both the FIH and the EMH are simplified approximations intended to highlight the essentials of complex dynamic processes and to inform policy. The EMH, however, has been forced to attach successive ad hoc qualifications, Ptolemaic fashion, to its core premises and associated policies in order to protect them from falsifying events. On the other hand, while the FIH in its current state falls short of adequately explicating open economy financial dynamics, it can be readily improved without abandoning its basic structure.

Thus from the EMH perspective the rapid expansion of portfolio and direct capital flows accompanying the decontrol of the OECD capital markets must have represented a major transfer of real resources to more efficient uses. Yet Martin Feldstein and associates have convincingly shown that the high correlation between domestic savings and investment that prevailed in the OECD countries prior to decontrol declined only negligibly after decontrol [Feldstein 1994]. What have declined precipitously from 1960s rates in all the OECD countries have been the growth rates of labor, capital and total factor productivity of the business sector, and somewhat less precipitously, real GDP growth rates [Felix 1997/98, tables 2, 6]. Such trends patently contradict the improved efficiency claims.

Global forex transactions per trading day have risen from $18 billion in 1977 to $1.5 trillion in 1998, and from 3.5 times the global export of goods and services in 1977mto 60 times in 1998 [Felix 1997/98, table 1; Economic Report of the President 1999, Box 6-1]. The connection between forex flows and trade financing has obviously been attenuating as has the impact of trade imbalances on exchange rates. For a time EMH adherents lauded these developments as efficiency enhancing, since much of the rising forex flows related to greater hedging against exchange risk, and increased opportunities for beneficial arbitraging of asset prices that the opening of capital markets made possible. But the increased hedging demand has been provoked by the greater exchange volatility which the increasing forex flows were producing. The creation of novel hedging instruments by financial houses, moreover, not only spread risks but created new ones by extending the chains of liability commitments linked to the hedging operations.

And since risks can only be hedged incompletely, the financial innovations have expanded opportunities for speculative position-taking as well as for profitable arbitraging, all of which have fed exchange volatility, motivating yet more forex trading.

A decade ago a London banker summarized the dynamic as follows:
A more controversial feature of the new shape of the financial system is that the bulk of its participants now have a vested interest in instability. This is because the advent of the high-technology dealing room has raised the level of fixed costs. High fixed costs imply a high turnover is required for profitability to be achieved.
High turnover tends to occur only when markets are volatile. The analysts at Salomon Brothers…put it clearly. “Logically the most destabilizing environment for an institutional house is a relatively stagnant rate environment” [Walmsley 1988, p.13].

A decade later, a Wall Street risk consultant observes: “When one considers that risk management in the early 1970s consisted almost entirely of the evaluation of credit risk, it is breath-taking to consider the galaxy of risks we track, analyze, and manage today.” The observation is supplemented by a “partial listing” of the galaxy containing 45 different categories of risk [Beder 1997, p.347].

Disconcerting also was the rising incidence of banking and currency crises. An IMF survey reports that during 1980-95 thirty-six of its 181 members had one or more systemic banking crises, and 108 others had one or more periods of “significant banking problems,” defined as “extensive unsoundness short of a crisis” [Lindgren et al. 1996, Annex 1]. These numbers have, of course, risen significantly since 1995. A prominent econometric paper found a strong correlation between the liberalizing of domestic financial markets and the incidence of banking and currency crises [Kaminsky and Reinhart 1996]. The IMF also reports that in a sample of 50 recent currency crises, the cumulative loss of output averaged around 15% of GDP [IMF 1998].

Although the IMF survey reported that three-fourths of the OECD countries had also suffered systemic banking crises or “significant banking problems,” proponents of financial liberalization focused on developing country problems, offering contradictory but equally embarrassingly timed advice on how to integrate successfully with the global financial markets. Following the 1995 Mexican crisis and the ensuing tequila contagion, the World Bank shifted to an evolutionary approach. Its 1997 research report, Private Capital Flows to Developing Countries: the Road to Financial Integration, arrays developing countries along a continuum. At the low end are countries that were early in the process of absorbing capital flows effectively, because they still lacked “a sound macroeconomic policy framework…a sound domestic banking system with an adequate supervisory and regulatory framework, and a well-functioning market, infrastructure and regulatory framework for capital markets.” Developing countries in the early stages should approach foreign capital cautiously, using capital controls to reinforce defenses against sudden surges and withdrawals. Those who have completed the requisites for full financial integration, however, should go for it. Accelerating the movement along this evolutionary path is the increasing skill of international financial markets in assessing developing country payoffs and risks. “Contagion effects of the kind seen after the Mexican crisis are not likely to be long-lasting.” Indeed, “aggregate net private capital flows to developing countries are likely to be sustained in the short to medium term because of the continuing decline in creditworthiness risks and other investment risks, the higher expected returns in developing countries, and the fact that these countries are under weighted in the portfolios of institutional investors [World Bank 1997, pp.2-5,78].

To measure movement along the continuum the report constructed a financial integration index. In 1985-87 only Korea and Malaysia ranked as “highly integrated,” but by 1992-94, 13 developing countries were “highly integrated” and 23 were “medium integrated.”5 However, since three of the highly integrated—Argentina, Mexico and Turkey—had nevertheless suffered major financial crises in the first half of the 1990s, stable financial integration required still other requisites, such as the balanced budgets, high savings rates and export-oriented investment that had enabled the East Asian countries to fend off the “tequila effect” in 1995. Indeed,
The most dynamic emerging [capital] markets, where progress has been particularly intense during the past five years, include most of high-growth Asia (Korea, Malaysia and Thailand, with Indonesia and the Philippines not far behind).
The East Asian markets stand out for their depth and liquidity, and because of efforts undertaken in the 1990s, their infrastructures are now equal to those in Latin America [World Bank 1997, p.59].
Unfortunately for the report’s evolutionary theory, forecasting skills and market timing, all five highly integrated East Asian economies bit the dust as the report reached the bookstores.6 It dropped from sight soon after.The OECD was another victim of mistimed publishing. In contrast to the World Bank, its remedy for the burst of financial crises was to speed up the financial liberalization process.

According to its projections, that would elevate per capita GDP of the “non-OECD world” by 270% by year 2020, compared to only a 100% increase, were the pace not accelerated [OECD 1997]. The report’s optimism relied heavily on the dynamism of the “emerging non-OECD economies…from Asia and Latin America” led by the “Big Five of Brazil, China, India, Indonesia, and Russia” [OECD 1997; preface]
This report, which also appeared as the Asian meltdown was gathering momentum, also faded quickly from circulation.

A recurring obbligato accompanying the crisis-strewn path of financial globalization has been mistaken optimism that improved transparency of information, the successive Basle Accords to tighten prudential bank regulations, and learning-by-doing improvement of lending skills by the lending institutions would stabilize the financial flows. At the 1979 conference on “Financial Crises and the Lender of Last Resort” (papers published as Financial Crises: Theory, History and Policy, Charles P. Kindleberger and Jean-Pierre Laffargue editors, Cambridge U, Press 1982) the paper dealing with rising developing country indebtedness observed optimistically:
Fortunately, the data published by international organizations (BIS, World Bank, IMF), by various national monetary authorities, and by some international banks have been considerably improved in recent years, as part of a deliberate move toward better coverage and understanding of international banking transactions, to help the bankers themselves in decision processes for lending abroad, in particular, in assessing country credit risks….no country has yet been forced into default, and it remains doubtful that this could occur [Metais 1982, pp. 223-225, 232, footnote 11].
Two years later the Third World debt crisis required a concerted bailout to stanch an international banking crisis.

Greater transparency was also the centerpiece of the G-7 response to the 1995 Mexican crisis, which authorized the IMF to establish a Special Data Dissemination Standard that,
“offers countries having, or seeking, access to international capital markets, a voluntary means of providing regular, timely and comprehensive economic data. A key feature of the implementation…will be an electronic bulletin board maintained by the IMF at a World Wide Web site on the Internet” [IMF Survey September 9, 1996, p.290].
Two years later, the Asian crisis led the BIS to observe exasperatedly that “in spite of the ready availability of BIS data showing increasing vulnerability of some of the countries to a sudden withdrawal of short-term international loans, the volume of these loans simply kept on rising” [BIS 1998].

Similarly, each successive Basle Accord to tighten prudential supervision has been a reaction to near global financial crises that exposed deficiencies of the previous accords. The deficiencies reflect the dark side of the skill-enhancing learning process. It has enabled the supervised banks to devise evasive innovations that keep the Basle Committee on Banking Supervision behind the curve.

In reacting to these “anomalies” academic economists have followed two contrary paths. The new open macroeconomics of the 1980s extends the prevailing mainstream obsession with the need to anchor macroeconomics on firm neoclassical “microfoundations” to international trade and finance. The “law” of one price, purchasing power parity and the EMH should prevail in the medium-term, because with the world economy moving ever more closely to free trade and free capital mobility, rational maximizing agents were offered increasing scope for taking positions based on “sound fundamentals.” This implies that relatively stable real exchange rates should prevail.

The other path has been to test these premises and conclusions empirically. These tests, conducted mostly on data from the industrialized countries, roundly reject the conclusions and most of the premises. In a recent survey of the tests, Charles Engel summarizes the results as follows [NBER Reporter Winter 1998/99]:
  1. “The failure of the law of one price accounts for over 90 percent of real exchange rate variations. In many cases it accounts for 98 to 99 percent of the variation.”7 [p.15]
  2. Purchasing power parity can be teased from very long-term data sets (100 years or more), but for shorter intervals within this span, the effects of different monetary regimes dominate real exchange rate volatility. “Generally, when nominal exchange rates are floating, the transitory component of the real exchange rate is highly volatile; when the exchange rate is fixed, the transitory component is very quiescent.” [p.15]
  3. Short and intermediate-term exchange and interest rate dynamics currently are best explained by the Frankel-Froot model [J. Frankel and K. Froot 1990], in which forex trading is dominated by “chartist speculators who do not evaluate investment opportunities rationally, but instead chase trends.” [p.17].
Yet Engel, who has contributed importantly to this critical testing, is still intimidated enough by the neoclassical microfoundations’s restrictive concept of rational behavior to add this cautionary conclusion:
From the modern (1990s) perspective, the shortcoming of the Frankel-Froot model is that it allows irrational herding behavior by economic agents. Additional serious research is needed to understand whether nonfundamental speculation can really drive short-run behavior of exchange rates [p.17].
An essential step toward developing an alternative Minsky-Keynes open economy macroeconomics is, therefore, to anchor it to a view of rational behavior that’s more appropriate to the behavior of the agents who dominate trading in asset markets. This requires disaggregating position-taking in the organized capital asset markets beyond Minsky’s tripartite hedge, speculative and Ponzi behavior, by elaborating Keynes’ beauty contest metaphor of Chapter 12 of his General Theory. Such markets are dominated by market-timing agents, whose short-term trading, financed by bank credit, provides most of the market liquidity. Position-taking by a rational trader must necessarily be based on assessing short as well as long-term determinants of the movement of asset prices within his trading horizon. It would also be irrational for him to assume that his assessment of each determinant, and his trading horizon, are identical to those of other traders. His trading response to news affecting fundamental determinants requires, therefore, that he also assess the likely response of other traders, in the knowledge that those responses also include an assessment of how he will respond.

Since a priori deductions of the state of other traders’ expectations involves an infinite regress into subjectivity, rational traders must resort primarily to inductive reasoning. There is no way for them to validate their expectational hypotheses other than by applying them and observing the results. Inductive reasoning is a rational decision process that precludes maximizing decision making. Heterogeneous traders inductively arriving at a common set of expectations would be a special case, based not on reaching general consensus on the “true model” of how fundamentals determine equilibrium prices, but on a confluence of judgments about likely reactions of traders to news about variables that impact short and long-term expectations, Such equilibria are likely to be unstable, producing asset price bubbles and crashes.

The conditions for an expectational equilibrium to emerge among heterogeneous traders is being explored through non-linear dynamic (chaos theory) modeling.

Mimicking markets made up of heterogeneous traders with varying beliefs and feedbacks requires models that are too complex for determinate solutions, but allow numerical experimentation. Brian Arthur and his Santa Fe Institute colleagues report the following results of their experiments [Arthur et al 1997]:8
We find that if our agents very slowly adapt their forecast to new observations of the market’s behavior, the market converges on a rational expectations regime. Here ‘mutant’ expectations cannot get a profitable footing….Trading volume remains low. The efficient market theory prevails.

If, on the other hand, we allow the traders to adapt to new market observations at
a more realistic rate, heterogeneous beliefs persist, and the market self-organizes into a complex regime. A rich ‘market psychology’—a rich set of expectations—becomes
observable. Technical trading emerges as a profitable activity, and temporary
bubbles and crashes occur from time to time. Trading volume is high, with times of
quiescence alternating with times of intense market activity. The price time series
shows persistence in volatility…and in trading volume….individual behavior evolves
continually and does not settle down [p.301].
An expectational equilibrium, it must be emphasized, merely means a convergence of trader expectations about asset prices. The inference that they are guides to the optimal allocation of resources in the real economy would be unwarranted. George Soros’ concept of reflexivity similarly stresses the self-referential formation of financial market expectations in his critique of the EMH [Soros 1994]. The inference that is warranted is that the neoclassical microfoundations are a poor basis on which to erect macroeconomic theory, whether open or closed.

The FIH gives direction to the above taxonomy. Financial markets become progressively more active during self-reinforcing runs of optimistic expectations,
sustained by the increasing willingness of banks to fund leveraged position-taking by
speculating traders. But the effect on new investment and credit risk according to the closed economy FIH has to be broadened in an open economy version to incorporate
exchange rate and other risks generated by free capital mobility, because these impact not merely the level but also the composition of investment, That is, the increasing volatility of interest and exchange rates raises the hurdle rate, which tilts investible funds toward projects with faster expected payoffs.9 Perceptions of credit risk may continue to decline, but a rising hurdle rate will concurrently steer investible funds toward shorter gestation projects: toward mergers and acquisitions rather than greenfield construction, and toward increasing “stockholder value” via share buybacks, and speculative financial forays. The declining growth rates of productivity and real GDP in the OECD countries that have accompanied the shift to floating exchange rates and the lifting of capital controls appear to reflect this dynamic.

Thus an increasing share of resources has been drawn to activities that supply liquidity and transfer ownership and risk. From the mid-1950s on, the share of GDP in each of the G-7 countries devoted to Finance, Insurance, and Real Estate (FIRE) has risen almost monotonically. Until the mid-1970s, the rising FIRE/GDP ratios were paralleled by rising real growth rates of non-financial goods and services, supporting the conventional view that financial deepening promotes real growth. Since then, however, the real growth of the non-financial sectors of each of the G-7 has fallen off even more than has real GDP growth, suggesting that the post-Bretton Woods rise of FIRE/GDP has been crowding out non-financial growth [Felix 1996; Charts 1-7]. Other data show that the share of the OECD labor force employed in finance proper rose 21% higher and the share of OECD investment in finance rose 104% higher in 1980-93 over their 1970-79 averages [Edey and Hviding 1995; Table 2]. Since 1975 financial services has been the fastest growing component of international trade, rising at 13% per annum, while FDI in financial facilities led the overall growth of FDI in services during the 1980s [OECD 1994, pp.38-40].

In sum, the claim that major welfare gains have ensued for both the industrial and developing countries from decontrolling capital markets has been, in Bhagwati’s trenchant phrase, “banner waving.” [Bhagwati 1998]. Instead of citing empirical support that such gains have ensued, the claimants have been tautologically trumpeting their theoretical claims as a posteriori proof.10

The most vulnerable participants in the globalizing financial system, the developing countries with their thin financial markets and more limited technological and managerial flexibility, have tried to strengthen defenses against currency runs by building up forex reserves. In 1997 they held 55% of global official reserves while doing less than 25% of global trade. With the dollar as the chief vehicle currency for trade and capital flight, a complex but unstable symbiosis has emerged between the U.S., the developing countries, and the rest of the OECD. Thus far it has benefited the U.S. economy at the expense of the others, but its dynamics include adverse feedbacks that are likely over time to erode the U.S. gains.

The U.S. benefits to date extend well beyond seignorage gains, which most estimates put at between 0.5 and 1.0 percent of U.S. GDP.11 The collective response of developing countries to their contagious currency crises has been to increase their desired reserve levels and to try to reach these levels by intensifying their exporting to the industrial countries, which has been deflating prices for imported consumer goods and industrial materials. However, because of the premier position of its currency, the U.S. has been able to export the dollar at will in exchange for these imports, i.e., run increasing trade deficits without being forced to raise its short-term interest rate to deter capital flight. Were more developing countries to shift in desperation to currency boards or, as in the case of Argentina, from currency board to complete dollarization, they would be further increasing the capacity of the U.S. to fund rising trade deficits. That is, the incessant demand for more dollar reserves by developing countries to protect against currency crises keeps overriding the corrective mechanism of conventional analysis, in which increasing foreign liabilities should limit the size of U.S. trade deficits, because foreign holders become unwilling to hold more dollars except at higher dollar interest rates. The other industrial countries, on the other hand, while benefiting from the improved terms of trade, have had to pay for their cheapened imports with exports and higher short term real interest rates.12

The dark side for the U.S. is that its dollar exporting is deepening a “Dutch disease” dilemma. U.S. residents whose income and wealth comes from ownership of financial assets, or who are employed in skilled positions in the non-traded goods sector, have garnered the lion’s share of the benefits. Those in the traded goods sector, on the other hand, have suffered losses of high productivity manufacturing and primary sector positions and an out-migration of labor to low wage service sector jobs. The result is a
resurgence of Wall Street-Main Street tensions over monetary and trade policy with interesting implications for the current debates over reforming the “architecture” of the global financial system.

Also threatening the favorable U.S. dynamics is the emergence of the euro as a potentially major alternative vehicle currency, and the diverging positions between the U.S. and most of the other G-7 on financial crisis management. Washington is encountering increased difficulty getting the other G-7 countries to keep contributing to the IMF bailouts and to acquiesce to its hands-off position on floating exchange rates and
free capital mobility.

Finally, the industrialized countries, most of all the U.S., have been basking in asset price trends that, as per the FIH, appear unsustainable. Since 1982 real interest rates on 10-year government bonds of each of the G-7 have averaged around twice their Bretton Woods averages [Felix 1997/98: Table 7]. Capital decontrol appears to account for most of the difference. That is, in the Bretton Woods era, when capital controls were
in place in most of the G-7, the only easy options open to holders of long bonds anticipating inflation from a credit-easing policy, were to shift to shorter-term bonds or to equities. Both moves tended to reinforce the policy goal of bringing output and employment closer to capacity. But with the capital decontrol of the 1980s, quick, easy movements by institutional investors between domestic and foreign bonds and equities,
and covered and uncovered interest arbitraging by banks and hedge funds, countered efforts to lower real interest rates, short and long. The U.S. has been only a partial exception. The reserve currency dominance of the dollar has allowed the Fed greater scope for lowering short-term real interest rates than has been permitted other G-7 central banks, but that advantage has not extended to long-term real rates.

The high long-term real rates presage a deepening of the current globalizing crisis. From the early 1980s on, they have been exceeding GDP growth rates by a rising percentage in each of the G-7. In the past decade, interest rates on 10-year governments have averaged more than double the GDP growth rates. The only historic parallel for this is the inter-war era, with the depressed 1930s accounting for most of the GDP growth shortfall. By contrast, during the pre-WWI Gold Standard era real interest and real GDP growth rates were equivalent [Felix 1997/98: Table 9]. With debt expanding faster than GDP since the early 1980s, the rentier share of G-7 income has been rising persistently.

High real interest rates should deter investment, but they have merely held back real not financial investment, as is evidenced by the explosive growth of M & A and equity prices. Capital’s overall share of national income has thus been rising, and since bonds and equities are mostly held by the top income decile, household income and wealth concentration has also been rising. Capital’s share can’t reach 100%. But stabilizing speculation seems far less likely to bring about a smooth asymptotic leveling of the share than are collapsing asset bubbles and political backlashes to terminate this open economy manifestation of the FIH in a hard landing, approximating--hopefully not too closely--that which terminated the 1920s asset price boom.

Reforming the “Architecture” of the Global Financial System


So is it adios EMH and bienvenido FIH? Not quite. The need to reform the “architecture” is now generally acknowledged, as is the need to reduce the volatility of short-term capital flows and the excessive reliance of developing countries on short-term external financing. But EMH thinking still imbues mainstream reform proposals, while Minsky’s closed economy policy advice for thwarting financial crises needs adaptation toopen economy conditions.

Washington and the IMF now include proposals to improve risk assessing by the major financial markets and to improve bank supervision, along with a litany of reforms directed at developing country financial management [Cf. Group of 22 Reports 1998].

They have also quietly suspended their twin crusades to universalize the adoption of capital decontrol and the Mutual Agreement on Investment (MAI). However, the premise that the freedom of capital to move globally is a major public good remains intact. The intent is to resume the two campaigns when the current crisis has subsided.

The proposals for improving risk assessing and bank regulation single out the same targets—inadequate information and transparency, better value-at-risk bank procedures— that successive architectural reforms since the first Basle Accord have aimed at. That this time they’ll finally get it right presumes that the EMH can finally be validated.

The proposals, however, bring to mind the old vaudeville interchange between two drunks fighting off imaginary leprechauns. “Close the door! They’re comin’ through the window! Close the window! They’re comin’ through the door!” That is, proposals to reduce excessive risk-taking by banks and institutional investors would increase contagion, while those that might reduce contagion would increase bank and
investor risk.

The value-at-risk (VAR) models used by banks to lessen the riskiness of their proprietary trading, hedge fund financing, and customized derivative mongering, are charged with not only encouraging excessive risk-taking by the banks, but also with intensifying contagion effects [Cf. Folkerts-Landau and Garber 1998]. By relying on backward-looking variance-covariance matrices and normal risk distributions they tended to underestimate the probability of large losses from taking long and short asset positions (the flaw that bankrupted the Long Term Asset Management hedge fund). Contagion was intensified because a volatility event in one country automatically generated an upward re-estimate of credit and market risk in a correlated country, which triggered automatic margin calls and tightening of credit lines in both countries. Such risk control methods help explain why Malaysia’s capital controls and Russia’s default produced a widespread cutoff of lending to developing countries. Tightening VAR methodology to lower risk-taking by banks is likely to strengthen contagious reactions.

Bond rating agencies are also caught between conflicting goals. They have been criticized for down-grading Asian bonds too late to alert investors pre-crisis, and then for “reactive downgrading of Asian sovereign ratings from investment grade to ‘junk status,’ [which] reinforced the region’s crisis…by forcing institutional investors who are required to maintain investment-grade portfolios to offload Asian assets. In response the rating agencies, having begun downgrading Latin American assets because of contagion risks rather than solely because of deteriorating fundamentals, are being accused of thereby reinforcing global crisis contagion” [Reisen 1998, p.19].

Conversely, a recent OECD policy brief [Reisen 1998] offers two proposals to reduce contagion that would surely increase investor risk. One is to remove investment grade requirements for pension funds and other bond-holding institutions and force them “to rely on their own judgment, rather than moving like herds on rating signals.” The other attacks the 1988 Basle Accords for assigning only a 20% risk-weight to bank loans of less than a year, and a 100% risk-weight to longer-term loans. This biases banks to lend short-term to developing countries and to engage in excessive inter-bank lending.

The policy brief proposes removing the “distortion” by equalizing the risk-weights. But the weights were designed to correct the excessive maturity mismatching between their short-term liabilities and the medium-term loans to developing countries that had brought major international banks to near insolvency in the early 1980s debt crisis; which proves that in finance one man’s “distortion” is another’s “correction.”

Improving risk assessment by requiring more timely and accurate data about foreign borrowers is another proposal that’s unlikely to prevent herd behavior by lenders.

Prior to the Asian crisis, “in spite of the ready availability of BIS data showing increasing vulnerability of some of the countries to a sudden withdrawal of short-term international bank loans, the volume of these loans simply kept rising” [BIS 1998]. This was in part because banks were securitizing their loans and then marketing the securitized bonds, shifting the credit risk to the bondholders. Securitizing also removed loans from bank balance sheets, enabling them to evade the risk-equity requirements of the 1988 Basle Accords and leverage a larger volume of loans from their equity. But diverse bondholders are more prone to herd behavior than are large banks. As Wall Street economist John Lipsky observes, “in a world of mobile, securitized capital, there is little likelihood that the IMF staff will be able to construct a credible stabilization program, including the needed structural reforms under crisis conditions in a matter of days” [Lipsky 1998].

Thus when market nervousness sets in, the timely publicizing of negative information is likely to exacerbate panicky withdrawal and contagion. Fear of such a reaction dissuaded the U.S. Treasury and the Fed from publicizing their adverse assessments of Mexico’s financial health until after the crisis broke out [Wessel et al. 1995].

All this fits the FIH view that financial market dynamics are inherently too unstable to be left alone after a one-time fix. Minsky, however, couched his stabilization advice in a closed economy setting. He assumed a single central bank that could effectively intervene as lender of last resort (LOLR) and a large public sector with a progressive tax structure and expenditure commitments that would allow automatic fiscal stabilizers to set a high floor under aggregate demand. His “anti-laissez-faire theorem,” an in-your-face rejection of the EMH’s contention that “policy surprises” are the main destabilizers of market behavior, also requires an activist government able to impose timely new “thwarting mechanisms.” [Ferri and Minsky 1992].13 Adapting these apercus to a global setting of decontrolled financial markets with no global LOLR, and national economies with varying policy goals, is, however, a complex exercise in political economy. Barry Eichengreen splits the current spate of architectural reform proposals in two groups: those that are “singularly unrealistic” and those that are “singularly unambitious.” In the first group he places—justifiably in my view—proposals for an international central bank to act as global prudential overseer and LOLR, an international bankruptcy court to settle debt conflicts, and other visionary schemes that demand
massive institutional and political transformations to become feasible. In the second group he puts mainstream proposals, such as cited above.

Escaping this depressing taxonomy, however, may be collective action shaped by the FIH, for a minimalist reprise of Bretton Woods. Recall that the Bretton Woods system was able to reconcile national and global stability needs fairly well for a quartercentury, facilitating, by most welfare criteria, “the Golden Age of Capitalism.” The conditions that accounted for its success—capital controls, a United States with the capacity to act as LOLR to the capitalist world, and Cold War anti-Communism as a motivating ideology—have since dissipated. But a modest approximation of Bretton Woods compatible with today’s changed conditions is technically, and may be becoming politically, feasible. The approximation requires implementing two interrelated reforms of the global financial architecture. One is a Big Three agreement to reduce exchange rate volatility by bounding the cross-rates between the dollar, euro and yen within a target
zone, with the other economies left free to tie their currencies tightly or loosely as they see fit to one of the three reserve currencies. The second, directed at weakening the capacity of financial markets to break up band arrangements, is a collective agreement to tax global forex transactions along the lines of the Tobin tax proposal.

Bounding the Big Three currency fluctuations provides a looser equivalent of the fixed dollar-gold price that had anchored the Bretton Woods adjustable peg system. To be effective, the Big Three would have to intervene jointly in the forex market to keep exchange rate fluctuations within the target zone. With open capital markets they would also have to subordinate other monetary-fiscal policy goals to the task. But the ease with which rampaging capital flows broke up the 1987 Louvre target zone agreement and the
ERM makes clear that protecting a Big Three target zone from such rampages is essential. A global Tobin tax could not only perform this task, but could also substantially reduce the collective coordination of monetary-fiscal policies required to sustain the target zone.

Tobin’s proposal for an international agreement to tax forex transactions at a small, uniform rate offers a “market friendly” way of deterring capital market rampages.

Instead of pointy or round-headed bureacrats trying to screen out hot money flows under a direct capital controls system, the tax leaves the screening to the markets. Around 80% of the $1.5 trillion global forex transactions per trading day are legs of round trips of a week or less. Most relate to arbitraging and open speculating by currency dealing banks, investment houses, hedge funds and multinational corporations, seeking to profit by taking large short-term positions to exploit small, transitory margins. A small tax on all
forex transactions would cut heavily into these margins and return on capital. It would impact negligibly the return on capital from international trade and FDI, since these involve much longer round trips and much higher profit margins per round trip.

Moreover, the tax on trade and FDI forex transacting would be compensated by reduced exchange risk and hedging needs attendant on more stable Big Three cross-rates.

The tax would help stabilize exchange rates in two additional ways. The tax revenue would substantially increase the resources available to the monetary authorities to counter-speculate in the forex markets. And reducing currency arbitraging would lessen the macro-policy coordination needed to sustain the target zone arrangement. The last is because the tax widens the interest rate differentials across currencies required to make arbitraging profitable. Indeed, the increased scope that the tax would provide national economies to implement full employment and other welfare goals without being immediately sandbagged by anticipatory capital flight is what originally motivated Tobin to propose the tax. By slowing the reaction speed of the globalized financial markets, the tax would allow welfare oriented policies more time to manifest results.
The tax effects vary non-linearly with the size of the tax, the response elasticities, and enforcement leakages. A recent set of conference papers sponsored by the United Nations Development Programme (UNDP) produced some converging of views concerning each of these three effects [Ul Haque et al. eds.1996]
  1. A tax of 0.1% on global forex transactions applied to the 1998 volume would produce between $180 and $220 billion revenue per annum, and a one-time drop of forex volume of from 13% to 49%, the variation reflecting different assumptions about pretax transaction costs and response elasticities.14 Almost all would impact short-term trading. For arbitraging strategies involving round trips each trading day the annualized tax would be 48%, while for international trade involving a 90 day financial trip, the annualized tax would be 0.8%
  2. Universal agreement would not be necessary to implement the tax. The U.K., the U.S., Euroland and Japan account for around 80% of global forex turnover. Bringing in Switzerland, Singapore and Hong Kong would raise the coverage to 91%. The remaining countries could be brought on board in one fell swoop by making joining a prerequisite for IMF loans.
  3. The tax should be levied on forwards and swaps as well as spot transactions, but how to tax customized derivatives effectively remains to be answered.
  4. To minimize offshore evasion, the tax should be levied at dealing rather than booking or settlement sites. Global forex dealing is dominated by a few dozen large financial houses, most of them headquartered in London and the Big Three. Their dealing rooms employ expensive equipment and talent. Moving dealing rooms as distinct from booking or settlement offices to tax free sites would be very costly. Doubling the tax when one of the counterparty is domiciled in a tax free location would be an effective deterrent. At least two financial houses would then have to move their expensive dealing operations concurrently to tax-free sites for evasion through relocation to work [Cf. Kenen 1996].
  5. Applying the tax to all instruments that have liquid, high volume markets, such as cross-currency treasury bill swaps, would minimize the payoff from shifting to nontaxed instruments. But since “financial engineers” would doubtless try to devise synthetic instruments to fit the bill, the tax agreement would need a supervisory body to oversee tax implementation and to recommend new “thwarting” changes as needed [Garber 1996; Kenen 1996]. However, gaming between financial authorities and financial innovators also plague the conventional proposals to improve the “architecture” of the global financial system, so is no basis for a priori dismissal of the Tobin tax.
  6. Because the tax would be collected by national tax authorities, the size of the tax revenue collected by the participating nations would differ enormously. The collective agreement to tax would also have to include an understanding on the allocation of the revenue. How much should be centralized? How much of the central fund should be devoted to a global LOLR function, and how much for projects in the developing countries, are distributive issues that the negotiators of the agreement would have to address.
  7. Finally, while the tax is primarily a crisis deterring device, allowing member countries individually or in concert to raise the tax rate above the uniform rate when under siege, could ameliorate crises by impeding capital flight and contagion, and with less reliance on interest rate spiking and demand-depressing measures to allay the currency runs.
Opposition from Washington renders nil the immediate prospects that reforms along the lines of this minimalist reprise of Bretton Woods will be taken up at the IMF, the G-7, or other official policy forums. The attempt by France, Germany and Japan to put a Big Three target zone proposal on the agenda of the recent G-7 ministerial meeting in Bonn was slapped down peremptorily by the U.S. delegation. The Tobin tax hovers like Banquo’s ghost over the G-7 and IMF conference tables. Indeed, Washington even suppressed the attempt by the UNDP to promote its aforementioned volume of conference papers on the tax [Le Monde Diplomatique, February 1997, “Le projet de taxe Tobin, bete noire”].

Political dynamics could, however, improve the medium-term prospects for the two proposals. The heightened priority that Euroland governments are giving to job creation while protecting the welfare state, will require protecting the euro against currency runs. Despite Washington’s opposition, European pressure for collective action to bound the Big Three cross rates is therefore likely to persist. While still off the table at
the governmental level the Tobin tax is, surprisingly, picking up grass roots support. A coalition of NGOs, academics and unions have succeeded in getting the Canadian House of Commons on March 23 to pass a bill by a 2 to 1 majority stating “That in the opinion of the House, the government should enact a tax on financial transactions in concert with the international community.” ATTAC, a movement of similar composition, has been gathering considerable support in France, and is spawning sister movements in other
Euroland countries.

 Economic logic, if not grass roots pressure, is pushing in a like direction in Japan. With its short-term interest rate locked in a liquidity trap, the government has been attempting to revive aggregate demand by monetizing a very sizeable increase of its fiscal deficit. The effort is threatened, however, by a flight from longer-term bonds that’s pushing up longer rates and increasing exchange rate volatility. The higher long rates depress aggregate demand directly and further weaken the fragile balance sheets of Japanese banks, while volatile exchange rate movements could heighten trade tension with the U.S. and even force Asian countries into another round of devaluation. Hence Japan’s support for bounding the Big Three cross rates remains strong, with Finance Minister Miyazawa almost dropping the second shoe by announcing his support for “market friendly” regulation of capital flows. [Reuters dispatch, March 1, 1999].

No comparable grass roots Tobin tax movement is yet evident in the U.S. But the persisting global crisis and the U.S. role of global consumer of last resort is reviving Main Street-Wall Street tensions. A widening array of import-competing activities with political clout is demanding import protection. Washington’s attempt to ride both its high horses—free trade and free capital mobility—is becoming politically precarious.

Concern that the momentum is with Main Street is evoking fearful memories of Smoot-Hawley among academic and media pundits. Will this persuade Washington to accept constraints on Wall Street in order to save free trade, or will it fall between the two steeds trying to accommodate both? Given the current level of Washington statesmanship, the odds favor the second. They could, however, shift to the first, were more mainstream economists to give up their addiction to the EMH, thereby depriving the case for free capital mobility of its intellectual cover.

References


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  1. Article VI is, however, a watered-down version of the original British draft proposal, which called for recipient countries to assist in the repatriation of illicit flight capital. The proposal was favored initially by the U.S. mission, but Wall Street-Treasury opposition forced the U.S. mission to pressure the British to accept a compromise excluding the collaboration requirement. This became Article VI. [Helleiner 1994].
  2. The canonical article was, of course, Milton Friedman’s “The Case for Flexible Exchange Rates,” Essays in Positive Economics” [Friedman,1953].
  3. Maurice Obstfeld, “Rational and Self-Fulfilling Balance of Payments Crises,” American EconomicReview, Vol. 76 (May, 1986), is a prescient precursor of such models.
  4. This is the thrust of IMF-Supported Programs in Indonesia, Korea and Thailand: A PreliminaryAssessment, by the IMF’s Policy Development and Review Department, and of the interview with Jack 
  5. The index averages a country risk rating, a capital flow/GDP ranking, and a flow composition ranking
    which gives greatest weight to portfolio inflows and bank loans [World Bank 1997, Box 1.1].
  6. It appears to have been intended for broad circulation as a didactic sequal to the World Bank’s East Asian Miracle.
  7. The tests compare the variance of prices of the same goods between countries with the variance of prices between different goods within countries. For a large array of data sets, the between country variance dominates the within country variance.
  8. The experiments consisted of varying parameters of a non-linear model that allows feedbacks to modify trading strategies, and applying it to the Santa Fe’s computerized Artificial Stock Market to generate alternative numerical runs. Embedded in the non-linear model is an expectational equilibrium. But whether the traders converge on it depends on the nature and speed of their reactions to the changing sets of prices, volume, yields, etc., generated by the computer runs.
  9. The hurdle rate is the minimum expected return that induces investment in projects involving front-end
    outlays—that is, fixed costs—and delayed revenue flow. Since information about the time-shape of future costs and revenues become more uncertain the longer the life of the project, delaying the project may reduce risk by allowing more information to be gathered. The hurdle rate of return adds a premium for “waiting” to the cost of capital in investment calculations. The premium is the present value of the expected income stream from postponing the project divided by the expected PV of starting the project now. Greater expected volatility raises the hurdle rate, as in option pricing [Dixit 1992].
  10. Two recent OECD studies are illustrative. One study, on estimating that half the rise of real long-term
    interest rates between the 1970s and 1980s was due to financial market liberalization, concludes that the large increase is a measure of the prior “distortion” that liberalization eliminated [Orr et al. 1995]. The second study acknowledges that whether the declining cost of financial transacting and the increased size and diversity of financial services resulting from financial liberalization has produced welfare gains, “depends on judgments about the value of the financial services being provided, in particular, the extent to which the increased financial activity is viewed as being of economic benefit rather than representing excessive or unnecessary financial churning.” But then without citing any supporting real economy data, the study concludes that the benefits were indeed substantial. The lifting of interest rate controls and “regulation-driven credit rationing” must have improved allocative efficiency by “opening up opportunities for international portfolio diversification” and by removing a distortion, whose importance is indicated by the substantial increase of the margin between interbank and bank-customer lending rates in the OECD countries after 1980 [Edy and Hviding 1995].
  11. The following points have benefited greatly from a personal communique from Dr. Srinivas
    Thiruvadanthai.
  12. The real short-term interest rates of all the G-7 except the U.S. and Japan have risen since the mid 1980s to far above their 1960s averages [Felix 1997/98; Table 8]. The Japanese exception is associated with its prolonged depression; whereas the U.S. exception coincides with its relatively prosperity.
  13. “Where the internal dynamics imply instability, a semblance of stability can be achieved or sustained by
    introducing conventions, constraints, and interventions into the environment. The conventions imply that variables take on values other than those which market forces would have generated: the constraints and interventions impose new initial conditions or affect parameters so that individual and market behavior change” [Ferri and Minsky 1992, pp. 20-21].
  14. The ranges are from estimates by Ranjit Sau and me, and are based on applying a simple model to 1995 forex data, using different transaction costs and elasticity assumptions [Felix and Sau 1996]. Jeffrey Frankel’s point estimate, using a different methodology obtained $176 billion revenue and a 45% reduction of volume from a 0.1% tax [Frankel 1996]. The original ranges, computed from 1995 forex data, are increased by 22% in this paper to take account of the higher forex volume in 1998..

Luis Clemente Faustino Posada Carriles

Luis Clemente Faustino Posada Carriles (born February 15, 1928) (nicknamed Bambi by some Cuban exiles)[1] is a Cuban-born Venezuelan anti-communist extremist, domestic terrorist, and former Central Inte…

Luis Clemente Faustino Posada Carriles (born February 15, 1928) (nicknamed Bambi by some Cuban exiles)[1] is a Cuban-born Venezuelan anti-communist extremist, domestic terrorist, and former Central Intelligence Agency agent.[2][3][4][5][6][7][8]

Posada has been convicted in absentia in Panama, of involvement in various terrorist attacks and plots in the Americas, including: involvement in the 1976 bombing of a Cuban airliner that killed seventy-three people;[9][10] admitted involvement in a string of bombings in 1997 targeting fashionable Cuban hotels and nightspots;[11][12][13] involvement in the Bay of Pigs invasion; and involvement in the Iran-Contra affair.[14] In addition, he was jailed under accusations related to an assassination attempt on Fidel Castro in Panama in 2000, although he was later pardoned by Panamanian President Mireya Moscoso in the final days of her term.[15][16] Posada Carriles has always denied involvement in the airline bombing and the alleged plot against Castro in Panama, but has admitted to fighting for "freedom" in Cuba.[17]

In 2005, Posada was held by U.S. authorities in Texas on the charge of illegal presence on national territory before the charges were dismissed on May 8, 2007. On September 28, 2005 a U.S. immigration judge ruled that Posada cannot be deported, finding that he faces the threat of torture in Venezuela.[18]Likewise, the US government has refused to send Posada to Cuba, saying he might face torture.[17] His release on bail on April 19, 2007 had elicited angry reactions from the Cuban and Venezuelan governments.[19] The U.S. Justice Department had urged the court to keep him in jail because he was "an admitted mastermind of terrorist plots and attacks", a flight risk and a danger to the community.[13] On September 9, 2008 the United States Court of Appeals for the Fifth Circuit reversed the District Court's Order dismissing the indictment and remanded the case to the District Court.[20] On April 8, 2009 the United States Attorney filed a superseding indictment in the case. Posada-Carriles' jury trial had been set for February 26, 2010 but it was announced on February 22 that it would be postponed for at least three months.[20][21] Posada-Carriles' trial ended on April 8, 2011 with a jury acquitting him on all charges.[22]

Although he has never been convicted for his various acts of violence, Peter Kornbluh of the National Security Archive has referred to him as "one of the most dangerous terrorists in recent history" and the "godfather of Cuban exile violence."[23] In Miami however, where Posada currently resides, he is considered "a heroic figure in the hardline anti-Castro exile community."

soledad americana

GABRIEL GARCÍA MÁRQUEZ

Antonio Pigafetta, un navegante florentino que acompañó a Magallanes en el primer viaje alrededor del mundo, escribió a su paso por nuestra América meridional una crónica rigurosa que sin embargo parece una aventura de la imaginación. Contó que había visto cerdos con el ombligo en el lomo, y unos pájaros sin patas cuyas hembras empollaban en las espaldas del macho, y

GABRIEL GARCÍA MÁRQUEZ Antonio Pigafetta, un navegante florentino que acompañó a Magallanes en el primer viaje alrededor del mundo, escribió a su paso por nuestra América meridional una crónica rigurosa que sin embargo parece una aventura de la imaginación. Contó que había visto cerdos con el ombligo en el lomo, y unos pájaros sin patas cuyas hembras empollaban en las espaldas del macho, y

la Olimpiada Internacional de Matemáticas

En Argentina , los camioneros ganan 2.8 veces el salario mínimo del país, los recolectores de basura ganan 2.6 veces el salario mínimo, y los maestros ganan 1.3 veces el salario mínimo. Un maestro que trabaja doble turno -de mañana y de tarde- gan…

En Argentina , los camioneros ganan 2.8 veces el salario mínimo del país, los recolectores de basura ganan 2.6 veces el salario mínimo, y los maestros ganan 1.3 veces el salario mínimo. Un maestro que trabaja doble turno -de mañana y de tarde- gana 2.59 veces el salario mínimo, que sigue siendo menos que el salario de un camionero o recolector de basura.

En México, aunque los docentes ganan más que los recolectores de residuos y los camioneros, una cruzada gubernamental destinada a mejorar los estándares educativos sufrió un golpe importante a principios de este mes, cuando sólo el 30 por ciento de los maestros asistieron a una prueba de evaluación nacional para docentes.

EL INFORME OPPENHEIMER

Las Olimpiadas de las que nadie habla


Andrés Oppenheimer
23 Jul. 12


Lo más interesante de la Olimpiada Internacional de Matemáticas (OIM) que se llevó a cabo la semana pasada en Mar del Plata, Argentina, no fue que los estudiantes asiáticos ganaran los primeros premios -con frecuencia lo hacen- sino el hecho de que el evento pasó prácticamente inadvertido en nuestra parte del mundo.



Aunque el torneo de matemática que se desarrolló entre el 4 y el 16 de julio tuvo una amplia cobertura periodística en Singapur, Corea del Sur, China y otros países asiáticos, concitó poca atención por parte de los medios de Estados Unidos y Latinoamérica.

Nuestras cadenas de television ya están enviando equipos periodísticos a los inminentes Juegos Olímpicos de Londres, pero muy pocos -si es que hubo alguno- enviaron un corresponsal a la Olimpiada de matemática en Mar del Plata.

La OIM de estudiantes de secundaria de Mar del Plata fue ganada por el equipo de seis miembros de Corea del Sur, que conquistó seis medallas de oro, seguido por los equipos de China (2o. puesto), EEUU (3o.), Rusia (4o.), Canadá (5o.), Tailandia (6o.) y Singapur (7o.).

Entre los países latinoamericanos, el mejor equipo fue el de Perú, que ocupó el puesto número 16, seguido por Brasil (19), México (31), Colombia (46), Costa Rica (46), Argentina (54), Chile (59), Venezuela (91) y Cuba (95). Individualmente, el primer premio correspondió a Lim Jeck, de 17 años, de Singapur, quien ganó una medalla de oro con puntaje perfecto.

Argentina, el país anfitrión de la OIM de este año, es un ejemplo típico de la poca atención que se le presta a la educación en muchos países latinoamericanos.

La mayoría de los periódicos argentinos sólo publicaron unos pocos párrafos sobre la OIM. Ni la Presidenta Cristina Fernández de Kirchner, ni el Ministro de educación del país estuvieron presentes para inaugurar el evento internacional.

En momentos en que muchos estudios internacionales revelan que la calidad de los docentes es la clave principal para mejorar los estándares educativos, los maestros en Argentina ganan mucho menos que los recolectores de basura y los camioneros.

Tal como me enteré durante una visita a Argentina hace unas pocas semanas, los camioneros ganan 2.8 veces el salario mínimo del país, los recolectores de basura ganan 2.6 veces el salario mínimo, y los maestros ganan 1.3 veces el salario mínimo. Un maestro que trabaja doble turno -de mañana y de tarde- gana 2.59 veces el salario mínimo, que sigue siendo menos que el salario de un camionero o recolector de basura.

No es casual que Argentina -que solía figurar entre los países con mejor educación de Latinoamérica- está situado hoy cerca de los últimos puestos en las pruebas estandarizadas internacionales PISA de matemáticas y ciencias para estudiantes de 15 años, muy por detrás de Chile, Uruguay, México, y Colombia.

En México, aunque los docentes ganan más que los recolectores de residuos y los camioneros, una cruzada gubernamental destinada a mejorar los estándares educativos sufrió un golpe importante a principios de este mes, cuando sólo el 30 por ciento de los maestros asistieron a una prueba de evaluación nacional para docentes.

Para quienes se estén preguntando si hay una relación entre la enseñanza de matemáticas y ciencias y el progreso de los países, la hay.

El país ganador de la OIM de este año, Corea del Sur, que tenía un ingreso per cápita mucho menor que casi todos los países latinoamericanos hace apenas cincuenta años, registró 13 mil 500 patentes internacionales en el Registro de Patentes y Marcas de Estados Unidos el año pasado, contra apenas 500 de todos los países latinoamericanos juntos.

En los últimos días, después de que el Presidente Obama anunció su plan de crear un cuerpo elite de maestros matemática y ciencia que recibirán 20 mil dólares extra por año, muchos expertos latinoamericanos señalaron que sin incentivos económicos y una jerarquización de la profesión, resultará difícil atraer buenos maestros a las escuelas latinoamericanas.

Mi opinión: en la batalla por la excelencia educativa que se está librando entre los países orientales y occidentales, que cada vez mas determinará el éxito de las naciones, nosotros en los medios compartimos gran parte de la responsabilidad por no poner la educación en el centro de la agenda pública.

No hay nada de malo en que los medios cubramos masivamente las Olimpiadas de Londres. Pero cuando centramos toda nuestra atención en las competencias deportivas, e ignoramos casi por completo los torneos de matemáticas y ciencias, estamos creando solo una clase de héroes, los deportivos, y estamos dejando de glorificar a quienes más probablemente harán los descubrimientos científicos que permitirán mejorar nuestra calidad de vida, o encontrar una cura para el cáncer.

Es hora de que glorifiquemos a los campeones olímpicos de matemáticas y ciencias de la misma manera en que glorificamos a los campeones olímpicos de lanzamiento de jabalina o natación.

Twitter: @oppenheimera

Papá cuéntame otra vez

Canción de Ismael Serrano. Homenaje a aquellos que lucharon por que un mundo mejor fuera posible.este video que es magnifico me recuerda? a mi padre, QEPD, quien fué torturado salvajemente bejo la Dictadura de Pinochet….Era un hombre buenísimo,f…

Canción de Ismael Serrano. Homenaje a aquellos que lucharon por que un mundo mejor fuera posible.

este video que es magnifico me recuerda? a mi padre, QEPD, quien fué torturado salvajemente bejo la Dictadura de Pinochet....Era un hombre buenísimo,fiel a sus ideas,idealista, jamás habría podido matar a alguien, este video me ha sacado lágrimas,....para tí viejo, que estás en un buen lugar.

Viva la Republica y viva aquellos que pensamos que? otro mundo es posible.

Darcy Ribeiro, el mayor antropólogo brasileiro?: "lo peor habría sido quedar al lado de los vencedores en esa batalla"

El rezago educativo

El secretario de Educación Pública, José Ángel Córdova Villalobos, calificó de histórica la evaluación de Carrera Magisterial con una participación global de 73% de los maestros, aunque lamentó la ausencia de los de Michoacán y Oaxaca.En con…

El secretario de Educación Pública, José Ángel Córdova Villalobos, calificó de histórica la evaluación de Carrera Magisterial con una participación global de 73% de los maestros, aunque lamentó la ausencia de los de Michoacán y Oaxaca.

En conferencia de prensa para hablar sobre la prueba Enlace, Carrera Magisterial y la Universal Docente, el funcionario destacó que la mayor participación en dicha prueba había sido de entre 60 y 65% y de los 505,118 docentes registrados, acudieron 369,525 a las 1,201 sedes.

En cuanto a la prueba Enlace, Córdova Villalobos precisó que el costo fue de 249 millones y el de preparación profesional de 30 millones de pesos, de los cuales 23 ya se venían aplicando cada año.

Mientras que el resto se dispuso para aquellos profesores que el próximo 6 de julio presentarán el Examen Universal Docente, así como para pagar los costos adicionales, tales como videograbación.

El titular de la SEP recordó que para los maestros de primaria que no están dentro del programa de Carrera Magisterial tanto de escuelas públicas como privadas, el 6 de julio se realizará el examen Universal Docente.

Destacó que ese mismo día se repondrían los exámenes en Michoacán, donde se presentaron ocho denuncias ante el bloqueo que se realizó para la evaluación, lo que afectó a 12,000 docentes.

Por otro lado, el secretario de Educación dijo que en Durango se recogió un examen de Carrera Magisterial apócrifo, en tanto que en Tabasco se detectó un “acordeón” recogido en la sede 27003 en Cunducacán, durante la aplicación del examen de Primaria de 1°, 2° y 3° grados.

Sin embargo, comentó que Rocío Llerena, del Centro Nacional de Evaluación para la Educación Superior (Ceneval), confirmó que dicho “acordeón” no correspondía ni a ese ni a ninguno de los ocho tipos de exámenes diseñados, de ninguna de las tres versiones elaboradas.

En ese sentido, lamentó que se siga en la cultura del “que no tranza no avanza” y comentó que es preciso hacer hincapié en los valores, que deben ser reforzados, lo cual se logrará con base en la educación en general y cívica, en particular; su ausencia, dijo, tiene una incidencia en el comportamiento global de las personas.

Córdova Villalobos comentó que la intención de querer abortar la realización correcta de este examen, lo que provoca que se tomen medidas extraordinarias y que, como en el caso de las elecciones, hacen que sus costos se eleven. “Tenemos que ir creando una conciencia de creer en nosotros mismos”.

Indicó que han trabajado muy de cerca con el Sindicato Nacional de Trabajadores de la Educación (SNTE) para construir juntos este trabajo.

“Sabemos que hay resistencias. Lo importante es que se entienda que no es para dañar a nadie, sino para apoyar. Y también la historia nos demuestra que al principio era poca la participación y ha ido subiendo.

Apelamos a que están tranquilos, a que hablen con sus compañeros que ya presentaron su examen, que no es nada del otro mundo, que son cosas que ellos ya conocen”, señaló.

Sobre si hubo denuncias contra los exámenes apócrifos, indicó que no se encontró a nadie en flagrancia, es decir, vendiéndolos, por ejemplo, y cuando si la hubo, resaltó, no trascendió la denuncia.

Respecto a las quejas de que hay iniquidad en las pruebas para los indígenas, indicó que el examen Enlace no discrimina por si mismo, pero si lo hace el contexto social en el que se realiza.

Finalmente, expuso que el gobierno no se reinventa cada seis años y que estos exámenes, si bien pueden cambiar en algo, son algo ya pactado con el SNTE para realizarse cada año.

mac



Andrés Oppenheimer
27 Sep. 10


Cuando le pregunté a Bill Gates en una entrevista sobre la convicción muy difundida en Latinoamérica de que la región tiene algunas de las mejores universidades y centros de investigación científica del mundo, el fundador de Microsoft me miró con cara de asombro. ¿De veras creen eso?, me preguntó.






Si los latinoamericanos están satisfechos con sus sistemas de educación pública -tal como lo revelan las encuestas- la región está en problemas, señaló. El secreto del éxito educativo y tecnológico de países como China e India es la humildad, y cierta dosis de paranoia, me dijo Gates.

En efecto, Latinoamérica podría beneficiarse de una pequeña dosis de paranoia constructiva respecto a la educación, ciencia, tecnología e innovación.

Según una encuesta de Gallup y el Banco Interamericano de Desarrollo, los latinoamericanos están mucho más satisfechos con sus sistemas educativos que los estadounidenses, los alemanes o los japoneses, a pesar de que los países latinoamericanos figuran entre los últimos puestos en las pruebas estudiantiles y en los rankings internacionales de educación.

Mientras 85 por ciento de los costarricenses y 84 por ciento de los venezolanos están satisfechos con sus sistemas de educación pública, sólo 66 por ciento de los alemanes y 67 por ciento de los estadounidenses están conformes con los suyos, dice la encuesta.

Simultáneamente, cuando uno mira los resultados del test PISA de jóvenes de 15 años en todo el mundo, se encuentra con que mientras los estudiantes de Hong Kong, China, sacan un promedio de 550 puntos en matemáticas, los de Corea del Sur 542 puntos y los de Estados Unidos 483 puntos, los estudiantes de Brasil, México, Argentina, Chile y Perú sacan un promedio de 400 puntos, y en otros países de la región mucho menos.

En la educación superior y la investigación, las estadísticas son tanto o más preocupantes.

- No hay una sola universidad latinoamericana entre las 100 primeras instituciones de educación superior del mundo, según el "Ranking del Suplemento de Educación Superior del Times 2009-2010". Un ranking similar de la Universidad Shanghai Jiao Tong, de China, tampoco incluye a ninguna universidad latinoamericana entre las mejores 100, a pesar de que Brasil y México figuran entre las 13 economías más grandes del mundo.

- De todas las inversiones en investigación y desarrollo en todo el mundo, menos de 2 por ciento se realiza en Latinoamérica, según el Observatorio Iberoamericano de Ciencia y Tecnología (RICYT). Comparativamente, casi 30 por ciento de las inversiones mundiales para investigación y desarrollo se realiza en países asiáticos, añade el informe.

- Mientras China invierte 1.4 por ciento de su PIB en investigación y desarrollo -la mayor parte proveniente del sector privado- Brasil invierte tan sólo 0.9 por ciento; Argentina, 0.6 por ciento; México, 0.4 por ciento, y Colombia y Perú, 0.1 por ciento, respectivamente.

- En materia de investigación, mientras un país asiático relativamente pequeño como Corea del Sur, que hace apenas 50 años era mucho más pobre que la mayoría de los países latinoamericanos, registra 80 mil patentes anuales en todo el mundo, Brasil sólo logra registrar 600 patentes por año, México unas 300, y Argentina 80, según la Organización Mundial de la Propiedad Intelectual.

- Sólo 27 por ciento de los jóvenes latinoamericanos en edad universitaria están inscriptos en instituciones de educación superior, comparado con 69 por ciento de sus pares de los países industrializados, según la Organización para la Cooperación y el Desarrollo Económico (OCDE).

¿Puede América Latina remontar este rezago? Por supuesto que sí. Durante la investigación que realicé en los últimos cinco años sobre la educación en el mundo, encontré ejemplos muy concretos que podrían mejorar rápidamente la calidad educativa en toda Latinoamérica, y también en Estados Unidos.

Chile creó un fondo de 6 mil millones de dólares para otorgar 6 mil 500 becas anuales a graduados universitarios para que hagan doctorados -casi todos en ciencias e ingeniería- en las mejores universidades de Estados Unidos y Europa.

Uruguay se ha convertido en el primer país del mundo en darle una computadora laptop a cada niño en las escuelas públicas. En Brasil se ha generado un exitoso movimiento ciudadano que está impulsando mejoras en la calidad educativa. Los ejemplos esperanzadores abundan.

Pero el primer paso debe ser acabar con el triunfalismo -como el reflejado en la reciente declaración del Presidente mexicano Felipe Calderón de que México es una "fortaleza" educativa- y, como decía Gates, ser más humildes. Sólo así, con una sana dosis de paranoia constructiva, como la de los asiáticos, podremos vencer la complacencia, crecer más y reducir más rápidamente la pobreza.

Esta columna esta basada en el nuevo libro de Andrés Oppenheimer "¡Basta de Historias!: La Obsesión Latinoamericana Con El Pasado y Las 12 claves Del Futuro'' (Random House-Debate, 2010).

Mesoamerican Studies

The Foundation (FAMSI) was created in 1993 to foster increased understanding of ancient Mesoamerican cultures. The Foundation aims to assist and promote qualified scholars who might otherwise be unable to undertake or complete their programs of research and synthesis. Projects in the following disciplines are urged to apply: anthropology, archaeology, art history, epigraphy, ethnography, ethnohistory, linguistics, and related fields.
The Research Department  provides access to the Barbara & Justin Kerr Photographic Collection, the Linda & David Schele Image Collection, the John Montgomery Drawing Collection, and the Bibliografía Mesoamericana. It also houses a Mesoamerican-oriented library that includes over 2600 volumes donated by Michael D. Coe. Projects funded by the Foundation are not restricted to investigations conducted on the Foundation premises. To go to the Research Department page, click here.
The Graz Codices
Now, courtesy of Akademische Druck – u. Verlagsanstalt – Graz, Austria, FAMSI provides access to their definitive facsimiles of the ancient accordion fold books created hundreds of years ago by Aztec, Maya and Mixtec scribes. To view these codices click here.
The Loubat Codices
Access to the duc de Loubat codex facsimilies in conjunction with Universitätsbibliothek Rostock and Bibliothek der Berlin-Brandenburgischen Akademie der Wissenschaften (BBAW), with thanks to Michael Dürr FAMSI project coordinator, Mr. Rosenau of Mikro-Univers, Ms. Danielewski and Dr. Thiemer-Sachse of BBAW. To view these codices click here.
The Kerr Maya Vase Collection
The Maya Vase Database is a photographic archive created by Justin Kerr, who devised a method of peripheral photography to create rollout photographs of circular vessels. Justin Kerr provides his copyrighted photographs at no cost for study purposes. Contact Barbara Kerr at mayavase@aol.com for information concerning fees for commercial use and publication rights. To learn more about the Kerr collections, click here or here to explore the Maya Vase data base directly.
The Kerr PreColumbian Portfolio
The PreColumbian Portfolio is an easily searchable database of photographs. It can be searched by selecting an item from a menu or by typing a word. Material is added frequently and spans a myriad of PreColumbian cultures. The Portfolio provides an opportunity to see images of sites, sculpture and ceramics other than vases. Click here to explore the Kerr PreColumbian Portfolio.
Mesoamerican Language Texts Digitization Project
The Mesoamerican Language Texts Digitization Project developed from a desire to make available to scholars, students, and enthusiasts world-wide, a selection of primary documents pertaining to the ethnohistory and linguistics of the indigenous populations of Mexico and northern Central America. This is a collaborative arrangement between Sandra Noble, Ph.D., Director, Foundation for the Advancement of Mesoamerican Studies, Inc. (FAMSI) and the Libraries of the University of Pennsylvania. To view these pages click here.
The John Montgomery Drawing Collection
This database of John Montgomery’s drawings is designed to allow scholars to study the sculpture and glyphic inscriptions in clear, linear drawings, while retaining the sensibility of the PreColumbian Maya artists. The drawings are primarily of Maya sculpture and objects from the ancient sites of Bonampak, Palenque, Piedras Negras, Seibal, and Tikal, among others. Informative captions accompany each image. While Mr. Montgomery’s copyrighted drawings are freely available for scholarly usage; information concerning fees for publication usage is available by contacting the Foundation. To learn more about John Montgomery with a link to his online «Dictionary of Maya Hieroglyphs», click here or here to explore the Drawing Collection directly.
Piedras Negras Archaeology, 1931-1939
An online publication from the University of Pennsylvania Museum of Archaeology and Anthropology Library. To learn more about the Piedras Negras Archaeology, 1931-1939, click here.
Piedras Negras Online
A photographic archive of the Piedras Negras Project, 1997-2000 by Stephen Houston, Héctor Escobedo, Zachary Hruby, and Jessica Skousen. This project excavated at Piedras Negras, Guatemala, over a span of four seasons, from 1997 to 2000. «Our objective as archaeologists has been to collect and share evidence. We are merely the stewards of research results at Piedras Negras, not its owners. For that reason, our database is to be used by anyone and everyone, provided their intent is scholarly.» To learn more about the Piedras Negras Project, click here or here to search the photographs directly.
Piedras Negras Archaeological Project
Years of investigations by the Piedras Negras Project of Brigham Young University and the Universidad del Valle, have produced valuable information about the Usumacinta river basin. During the 1999 field season, KBYU Television sent a camera crew to Piedras Negras to capture an «image» of the site and the work being conducted there. Click to view the video clips that provide an audio/visual introduction to the archaeological site. Also the 2000 field season has permitted the completion of works in the South Group and in the Acropolis, adding fresh information on the population and its artifacts. To view this report (only available in Spanish at this time) click here.
Introduction to Mesoamerica
When Mexican historian Paul Kirchhoff first introduced the term «Mesoamerica,» he defined it as a cultural zone where the indigenous inhabitants spoke as many as sixty different languages, but were united by a common history and shared a specific set of cultural traits that made their civilization unique in the world. Dr John Pohl, an eminent authority on American Indian civilizations, has put together a primer of Mesoamerican History. To view these pages click here.
Maya Museum Database
An online resource, the Maya Museum Database gives students, scholars, and anyone interested in Maya art a good starting point for their research. Along with a list of Maya collections, the database also provides active features, such as hyperlinks to available homepages and e-mail addresses. To learn more about Maya Museum Database, click here or here to explore the Database directly.
The Linda Schele Drawing Collection
The Schele Drawing Collection consists of about one thousand drawings of Mesoamerican monuments, buildings, objects, and hieroglyphic texts, with an emphasis on ancient Maya objects from México, Honduras, Guatemala, and Belize. Approximately 960 of Linda Schele’s drawings have been catalogued with brief descriptions. These drawings are available to the public free of charge, with restrictions for commercial use and publication. To learn more about Linda Schele and the drawing collection, click here or here to explore the drawings directly.
The Tikal Digital Access Project
During the fifteen years (1956-1970) that the University of Pennsylvania Museum (UPM) carried out archaeological investigations at the ancient Maya city of Tikal, Guatemala, professional photographers and researchers created over 60,000 photographic images. A great many of these images recorded primary data about the Maya past during architectural restoration, excavation, survey, and laboratory work. Click here to learn more about the Tikal Digital Access Project or here to search the images.
Catalogue of Zapotec Effigy Vessels
The Zapotec, whose ancient culture flourished for over a millennium in southwest Mesoamerica, have been the topic of a diversity of studies primarily because their unique history provides clues about the origins of civilization and how urban societies evolve. One aspect of their material culture has received special attention, the so-called Zapotec urn, a type of ceramic vessel with anthropomorphic or zoomorphic effigies attached. Because these artifacts are rich in iconographic information, their study has offered an unparalleled source of information on ancient Zapotec society. Adam Sellen’s catalogue of Zapotec Effigy Vessels is a versatile tool designed to present the most up to date information on the urns in a way that is inter-relational and easy to access. This on-line catalogue of artifacts is a dynamic entity, one that can be constantly updated, corrected and added to as new information comes forth. Click here to learn more about the Catalogue of Zapotec Effigy Vessels.
Independent Works
The Foundation is pleased to post the research of scholarship not funded by FAMSI but that contributes to the advancement of Mesoamerican studies. Potential contributors should contact the director, Dr. Sandra Noble. To view additional resources, click here.
The Foundation (FAMSI) was created in 1993 to foster increased understanding of ancient Mesoamerican cultures. The Foundation aims to assist and promote qualified scholars who might otherwise be unable to undertake or complete their programs of research and synthesis. Projects in the following disciplines are urged to apply: anthropology, archaeology, art history, epigraphy, ethnography, ethnohistory, linguistics, and related fields.

The Research Department  provides access to the Barbara & Justin Kerr Photographic Collection, the Linda & David Schele Image Collection, the John Montgomery Drawing Collection, and the Bibliografía Mesoamericana. It also houses a Mesoamerican-oriented library that includes over 2600 volumes donated by Michael D. Coe. Projects funded by the Foundation are not restricted to investigations conducted on the Foundation premises. To go to the Research Department page, click here.

The Graz Codices

Now, courtesy of Akademische Druck - u. Verlagsanstalt - Graz, Austria, FAMSI provides access to their definitive facsimiles of the ancient accordion fold books created hundreds of years ago by Aztec, Maya and Mixtec scribes. To view these codices click here.

The Loubat Codices

Access to the duc de Loubat codex facsimilies in conjunction with Universitätsbibliothek Rostock and Bibliothek der Berlin-Brandenburgischen Akademie der Wissenschaften (BBAW), with thanks to Michael Dürr FAMSI project coordinator, Mr. Rosenau of Mikro-Univers, Ms. Danielewski and Dr. Thiemer-Sachse of BBAW. To view these codices click here.

The Kerr Maya Vase Collection

The Maya Vase Database is a photographic archive created by Justin Kerr, who devised a method of peripheral photography to create rollout photographs of circular vessels. Justin Kerr provides his copyrighted photographs at no cost for study purposes. Contact Barbara Kerr at mayavase@aol.com for information concerning fees for commercial use and publication rights. To learn more about the Kerr collections, click here or here to explore the Maya Vase data base directly.
The Kerr PreColumbian Portfolio
The PreColumbian Portfolio is an easily searchable database of photographs. It can be searched by selecting an item from a menu or by typing a word. Material is added frequently and spans a myriad of PreColumbian cultures. The Portfolio provides an opportunity to see images of sites, sculpture and ceramics other than vases. Click here to explore the Kerr PreColumbian Portfolio.

Mesoamerican Language Texts Digitization Project

The Mesoamerican Language Texts Digitization Project developed from a desire to make available to scholars, students, and enthusiasts world-wide, a selection of primary documents pertaining to the ethnohistory and linguistics of the indigenous populations of Mexico and northern Central America. This is a collaborative arrangement between Sandra Noble, Ph.D., Director, Foundation for the Advancement of Mesoamerican Studies, Inc. (FAMSI) and the Libraries of the University of Pennsylvania. To view these pages click here.

The John Montgomery Drawing Collection

This database of John Montgomery’s drawings is designed to allow scholars to study the sculpture and glyphic inscriptions in clear, linear drawings, while retaining the sensibility of the PreColumbian Maya artists. The drawings are primarily of Maya sculpture and objects from the ancient sites of Bonampak, Palenque, Piedras Negras, Seibal, and Tikal, among others. Informative captions accompany each image. While Mr. Montgomery’s copyrighted drawings are freely available for scholarly usage; information concerning fees for publication usage is available by contacting the Foundation. To learn more about John Montgomery with a link to his online "Dictionary of Maya Hieroglyphs", click here or here to explore the Drawing Collection directly.

Piedras Negras Archaeology, 1931-1939

An online publication from the University of Pennsylvania Museum of Archaeology and Anthropology Library. To learn more about the Piedras Negras Archaeology, 1931-1939, click here.

Piedras Negras Online

A photographic archive of the Piedras Negras Project, 1997-2000 by Stephen Houston, Héctor Escobedo, Zachary Hruby, and Jessica Skousen. This project excavated at Piedras Negras, Guatemala, over a span of four seasons, from 1997 to 2000. "Our objective as archaeologists has been to collect and share evidence. We are merely the stewards of research results at Piedras Negras, not its owners. For that reason, our database is to be used by anyone and everyone, provided their intent is scholarly." To learn more about the Piedras Negras Project, click here or here to search the photographs directly.

Piedras Negras Archaeological Project

Years of investigations by the Piedras Negras Project of Brigham Young University and the Universidad del Valle, have produced valuable information about the Usumacinta river basin. During the 1999 field season, KBYU Television sent a camera crew to Piedras Negras to capture an "image" of the site and the work being conducted there. Click to view the video clips that provide an audio/visual introduction to the archaeological site. Also the 2000 field season has permitted the completion of works in the South Group and in the Acropolis, adding fresh information on the population and its artifacts. To view this report (only available in Spanish at this time) click here.

Introduction to Mesoamerica

When Mexican historian Paul Kirchhoff first introduced the term "Mesoamerica," he defined it as a cultural zone where the indigenous inhabitants spoke as many as sixty different languages, but were united by a common history and shared a specific set of cultural traits that made their civilization unique in the world. Dr John Pohl, an eminent authority on American Indian civilizations, has put together a primer of Mesoamerican History. To view these pages click here.

Maya Museum Database

An online resource, the Maya Museum Database gives students, scholars, and anyone interested in Maya art a good starting point for their research. Along with a list of Maya collections, the database also provides active features, such as hyperlinks to available homepages and e-mail addresses. To learn more about Maya Museum Database, click here or here to explore the Database directly.

The Linda Schele Drawing Collection

The Schele Drawing Collection consists of about one thousand drawings of Mesoamerican monuments, buildings, objects, and hieroglyphic texts, with an emphasis on ancient Maya objects from México, Honduras, Guatemala, and Belize. Approximately 960 of Linda Schele’s drawings have been catalogued with brief descriptions. These drawings are available to the public free of charge, with restrictions for commercial use and publication. To learn more about Linda Schele and the drawing collection, click here or here to explore the drawings directly.

The Tikal Digital Access Project

During the fifteen years (1956-1970) that the University of Pennsylvania Museum (UPM) carried out archaeological investigations at the ancient Maya city of Tikal, Guatemala, professional photographers and researchers created over 60,000 photographic images. A great many of these images recorded primary data about the Maya past during architectural restoration, excavation, survey, and laboratory work. Click here to learn more about the Tikal Digital Access Project or here to search the images.

Catalogue of Zapotec Effigy Vessels

The Zapotec, whose ancient culture flourished for over a millennium in southwest Mesoamerica, have been the topic of a diversity of studies primarily because their unique history provides clues about the origins of civilization and how urban societies evolve. One aspect of their material culture has received special attention, the so-called Zapotec urn, a type of ceramic vessel with anthropomorphic or zoomorphic effigies attached. Because these artifacts are rich in iconographic information, their study has offered an unparalleled source of information on ancient Zapotec society. Adam Sellen's catalogue of Zapotec Effigy Vessels is a versatile tool designed to present the most up to date information on the urns in a way that is inter-relational and easy to access. This on-line catalogue of artifacts is a dynamic entity, one that can be constantly updated, corrected and added to as new information comes forth. Click here to learn more about the Catalogue of Zapotec Effigy Vessels.

Independent Works

The Foundation is pleased to post the research of scholarship not funded by FAMSI but that contributes to the advancement of Mesoamerican studies. Potential contributors should contact the director, Dr. Sandra Noble. To view additional resources, click here.

American Pie

“American Pie” is partly biographical and partly the story of America during the idealized 1950s and the bleaker 1960s. It was initially inspired by Don’s memories of being a paperboy in 1959 and learning of the death of Buddy Holly. … Continue reading

“American Pie” is partly biographical and partly the story of America during the idealized 1950s and the bleaker 1960s. It was initially inspired by Don’s memories of being a paperboy in 1959 and learning of the death of Buddy Holly. “American Pie” presents an abstract story of McLean’s life from the mid-1950s until the end of the 1960s, and at the same time it represents the evolution of popular music and politics over these years, from the lightness of the 1950s to the darkness of the late 1960s, but metaphorically the song continues to evolve to the present time. It is not a nostalgia song. “American Pie” changes as America, itself, is changing.

For McLean, the transition from the light innocence of childhood to the dark realities of adulthood began with the deaths of his father and Buddy Holly and culminated with the assassination of President Kennedy in 1963, which was the start of a more difficult time for America. During this four year period, Don moved from an idyllic childhood, through the shock and harsh realities of his father’s death in 1961, to his decision, in 1964, to leave Villanova University to pursue his dream of becoming a professional singer.

The 1950s were an era of happiness and affluence for the burgeoning American middle class. Americans had a feeling of optimism about their prospects for the future, and pride in their nation which had emerged victorious from World War II, setting the world free from the tyranny of Nazi Germany. Popular music mirrored society. Performers such as Buddy Holly, Elvis Presley, and Bill Haley and the Comets churned out feel-good records that matched the mood of the nation. Sinister forces such as communism were banished, and serious folk groups like the Weavers were being replaced by the beat poets who, as members of the intelligentsia, were excused their lack of optimism.

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