Crisis Talk - The World Bank Group

Crisis Viewing

Our friends at PBS have released a couple of interesting crisis-related television programs this week.

First, Charlie Rose has an excellent interview with Andrew Ross Sorkin (type Sorkin's name into the Charlie Rose search window to access the video). Mr Sorkin discusses his just-released book, Too Big to Fail, telling the story of last year's Wall Street meltdown through the window of Paulon, Blankfein, Geithner, and other members of Wall Street's ruling coterie.

Next, Frontline has a new program entitled The Warning, which traces the roots to the crisis back through the 1990s. Naked Capitalism has several posts that provide useful background information to the characters and themes of the show.

Both are well worth viewing, particularly if you don't have time to read through Sorkin's 600+ page monster.

Exchange Rate Movements in the Crisis and Beyond

Editor's note: Sebastian Weber and Charles Wyplosz are from the Graduate Institute in Geneva. They are the authors of a World Bank working paper on Exchange Rates during the Crisis.

A key leitmotiv as the financial crisis unfolded was to avoid a repeat of the policy mistakes of the Great Depression, including the beggar-thy-neighbour competitive devaluations which have had devastating effects causing rising protectionism and a collapse of international trade (Kindleberger, 1973).

Unlike in the 30s, only some 42% of countries are officially pegging their exchange rate today, implying that movements in the exchange rate do not necessarily reflect official decisions, but are rather market-driven. Furthermore, governments today have many more policy tools at hand, ranging from fiscal policy over labour markets to monetary policy measures, making them less reliant on measures that are perceived as beggar-thy-neighbour.

While exchange rates have moved a lot since the onset of the crisis, these movements have mostly been interpreted as a byproduct of expansionary policies and the move to ‘quality’. Sharp depreciations in countries like the UK or South Korea have not been welcomed by the authorities, at least not officially. Intentions, of course, are hard to detect and no one will argue that expansionary policies were not needed.

 

Today in China: Panda Put or Cliff Dive?

In light of yesterday's 6 percent drop in the Shanghai composite, there is increasing speculation about the sustainability of the buildup in Chinese equity markets (see recent post).

China’s stimulus efforts, led by increased bank lending, have caused the economy to look more and more frothy:

Is there a China bubble brewing?  If so, will the Chinese government intervene to avoid a crash (the panda put option)? Or are we in for a sharp correction?  Let's see where the market pundits stand:

Micronesia Disclosure Bill Vetoed: How to Overcome Concerns about Separation of Powers and Privacy?

We have recently witnessed how the financial crisis has prompted the extension of disclosure requirements for government officials and corporate executives in Russia, China and Hong Kong (China). My prognosis was that more and more disclosure was coming up.
 
However, no wave comes without a retreat. On April 27, the President of Micronesia cited infringement of the separation of powers and of privacy in vetoing the disclosure bill, passed by the country’s Congress a month earlier. The bill required public disclosure of assets, income and business interests by holders of the country’s top political offices, such as the President, Vice-president, members of the Congress, ministers, Chief Justice of the Supreme Court, Public Auditor and members of the board of directors of the Development Bank of Micronesia. The disclosure requirements also covered immediate family members of officials. The administration of disclosure was to be vested with the country’s election authority. 

The U.S. as an Emerging Market?

Simon Johnson, a prolific academic writer and former Chief Economist of the IMF, has come out with a relatively negative view on the U.S. financial system, both current and past. According to Simon, the personal interlinkages between the political and financial systems in the U.S. are very similar to those in many, if not most, emerging markets. And the policy approach towards solving the financial crisis has been dominated by attempts to minimize the pain for bankers, rather than for the overall economy. The bank-by-bank approach with generous bail-outs, while avoiding more drastic actions that might risk shareholders’ equity stakes and senior manager bonuses, has not really helped so far. In order to really get out of the slump, Simon recommends more decisive action in the banking sector, including temporary nationalization and clean up of banks, but also the breaking-up of the financial oligarchy with its links to the political system.

Russian Leaders Join the Global Assets Disclosure Movement

On Monday, Russian President Dmitry Medvedev and Prime Minister Vladimir Putin published their assets and income declarations for 2008. The move was followed by the the Cabinet ministers on Tuesday. Among other officials, the Speaker of the Upper House of the Parliament, Sergey Mironov, published his declaration on April 1.

In a TV interview aired on March 24, Mr. Medvedev made disclosure a moral value. When disclosing, "every person will have to make the decision to honestly show his income and assets or to hide them”, he stated. Using his own example, the president intends to solve the debate on whether the declarations should be published. A debate, which has not been solved legislatively - Russian disclosure laws, including the big anti-corruption package of December 2008, are ambiguous about publication of declarations.

China: Government Officials' Property Declarations Published

On February 17, 2009 the Chinese government announced that senior public officials in the Altai district, Xinjiang province, are the first in China to publish their property declarations on the Internet. This is the start of a pilot on officials' disclosure reform, which has been on the agenda for some time.

The 4 trillion RMB ($586 billion) stimulus package in China gives national and regional government officials greater powers to select projects for investment, thus increasing the risks of misuse of authority for personal benefit. "[In this context] the issue of publicity of officials' personal property raises a heated discussion in the whole society," reports China News, a major online agency.

The Chinese government is testing the disclosure reform in Xinjiang province before extending it to the whole country. The declarations published in the Altai district contain information on all types of material benefits received by officials, including salary, consultancy and author fees, gifts and sponsored holidays or celebrations. More than 1000 declarations by senior government officials at the district level are being made public. Information on assets, including real estate, vehicles, bank deposits, stocks and bonds, and liabilities, is also declared but kept confidential.

Li Chengrui, former Director of the National Statistics Bureau and one of the proponents of the reform, says that it "does not need preparation and re-preparation." The financial crisis, it seems, has become an opportunity for promoting greater disclosure by politicians.

Russian Stimulus Spending Debate: Opportunities for Greater Transparency

This last January the Russian Parliament adopted in a breakthrough vote the Law on Access to Government Information, which has been pending ever since… 1997! The context for this measure is a heated debate on the usage of stimulus money. If you Google “anti-crisis money” in Russian, you'll see what I'm talking about: all top results are about ensuring the transparency of spending.

Most importantly, the new Russian law, which will enter into force on January 1 of next year, reversed the principle of access to public information in the country. From now on, government information is presumed to be open. It is no longer the citizen who has to convince the official why s/he needs the information. It is the official who has justify why (if so) the information is not granted.

Being very high-tech minded, the authors of the law placed the responsibilities on the government agencies to proactively publish on the Internet their legislative acts and information on their structure, budgetary spending and activities. To ensure broader access, public Internet spots will be created in government premises and public libraries. Government websites will have email channels for submitting queries. Furthermore, for the first time ever, the law opens the door for citizens to attend meetings of government collegial bodies.

Access to public information is a crucial transparency area. Although critics say that the law may have weaknesses, Russia is definitely progressing in turning the financial crisis into an opportunity for greater transparency.