Later this week the G20 meets in London, England under extraordinary security. Heads of State will discuss options for our future based on their assessment of the processes of economics that generated the present difficulties.
On the top of the list must be the future role of the IMF, and one can be forgiven after what has happened whether the IMF has been neglecting its mandate, which is to ensure that the world economy grows and inflation is kept in check. The idea may have arisen in many minds as to whether it is a failing of the staff of the IMF or its political bosses. Its one thing for staff to comment on what countries should do, but quite another to buffet the pressures of governments pushing their own agenda a views of what makes good world order.
The IMF Slept While Housing Inflation Raged in the US and UK.
At fault is the price index used by the IMF to assess whether inflation exists. A new index needs to be worked out that assesses contributions of inflation in long term investment forces, such as housing, land rental, residence rental and property. This is a minimum and security of pensions and of pensioners is at stake.
The main economic idea to be supported is that inflation is socially divisive and has in the past contributed to the deterioration of the social fabric of the period immediately before the second great war.
The role of the IMF, its primary role, is to ensure that the world does not deteriorate into stagflation that brings about international conflict in trade and investment, especially if such deterioration and conflict can be avoided by good economic policy.
Stability in the Housing and Building Industry
Its very strange that Gordon Brown should be mouthing off about how upset he and the people around him are about how profligate the banks have been. Going back in time, one can see that the approach of allowing the big five in the UK to lend to the housing market resulted in an over investment in that market relative to what could be sustained. Its fairly easy to see that liberalization of the banking system in this one aspect was controversial from the start as it was based on the wrong assumption that banks in the UK could lend long and borrow long. That is not the case. Even building societies have problems borrowing long.
The competitive reaction analysis done by Knickerbocker in the 1960's, by Gary Hufbauer in the 1960's and by numerous economists like myself in the 1970's, was suggestive enough that American banks would bring with them a competitive reaction relationship from the US and the very financial technologies suitable for America but unsuitable for the UK. The US banking system is vastly different from that of the UK and the rules that US banks like to follow are competitive, dishonest and legalistic rather that cooperative and honest as in the UK. In essence, the British banks increased in number as Building Societies became banks. The ethics of British bank fell prey to the lack of ethics in American banking. The US disease has been seen around the world and suggests that we need to move to remove the sickness of doing what is legal and replace it with doing what is good for everyone.
At the very least, the OECD technology wing should study the competitive situation in banking systems of the members of the OECD and come up with proposals for reform.
Stability in World Banking and My Recommendations of Starting Steps to Achieve it
It is fair to say that people are holding too much debt. Much of existing debt needs to be written off, but it needs to be done within a cooperative frameworks rather than competitive frameworks. Under competition, banks will gobble each other up as they dishonestly portray their financial situations. Camouflage and obfuscation is the 'order of war' between banks. People will be thrown out of houses to make balance sheets look good!!
1. The OECD should study the technologies of the banking systems and make recommendations based on high technology considerations.
2. The OECD should also study the nature of banking sector risk and make recommendations regarding what forms of hedge funds would be permitted based on risks of the forms we have seen and based on simulations of potential industrial growth permutations.
3. The IMF should reexamine the role of the SDR as a commercial medium of exchange and store of value. The US dollar as a stable unit of account is exaggerated. The Chinese, Brazilians and Russians are quite right in asking for a basket of currencies, and in my view it should be the SDR.
3. Oil and energy taken from the ground (gas, petrol, wood, and other contaminate) should be priced in SDRs. The IMF should regulate these pricess to ensure the environment targets, what ever they may be, are met. A proportion of the revenues should go to the IMF to help finance solar energy and clean energy production in small economies. Energy from the sun should be priced in the currencies of countries of source.
4. A better approach for housing finance is that certain debts be forgiven over the long period on a sliding basis. What should happen, in my humble view is that all housing debt after 2004 be locked in at fixed rate of two percent and the 60 year maturity assigned. Each year thereafter the maturity of the loan should be adjusted forward by one year. After fifteen years these loans should be reviewed and differentiated between manageable and unmanageable accounts. Those that cannot afford their properties should sell them and move to other locations.
5. All new loans for housing should have a fixed interest rate of greater than 2 percent. All borrowers should be allowed a single multiple of 3.5 times current annual income, and married couples 5 times joint incomes. Capacity to repay should be the basic rule.