When the likes of Ron Ball and Tom Everett of Barclays innovated the inter-bank market in the 1960s, big banks had the sound internal oversight of a single individual Treasurer, and respected their international departments that contained a reliable economics unit or group of economists familiar with competitive processes of the real world and not just some abstract theories of higher mathematics or obtuse economics logic based on political leanings and ignoring historical analysis. These people kept banks away from gross mismatches of liquidity or extreme policies that the competitive reaction response between banks produces. Banks live in a highly competitive international economy for financial instruments and arrangements. It is only to easy to forget, the close links of the IMF and the World Bank that now exist through operations of central banks to this world of risky finance. The definitions of growth and of inflation have been lost or hidden within so much abstraction as to become meaningless for practical purposes. It has become fashionable to try to finance one's way out of difficulties without addressing the glaring weaknesses in competitive environment and gross abuses of the legal and moral frameworks that societies rely on to live in peace! It is not a question of freedom, but one of balance, of art in management and of appropriately using the skills contained in more sound social arrangements. This is not a problem only of money but also of system and structure and history!
Over time, however, the financing of the world economy and the liquidity of commercial banking have moved increasingly in concert with each other. The point is that the IMF and World Bank have moved so far into cooperation with private banking that they promoted each other's goals and formed tighter and tighter relationships originating from the major financial centers and central banking communities.
What was hidden from view was the goal of the IMF to keep inflation rates down and provide the basis for growth because of the history of hyper-inflations and lack of trust between major political and financial groups. Behind this distrust was competition between the UK and Germany. Jealousy of the British Colonial system produced a rivalry that enveloped the world in conflict and disarray despite the League of Nations. The IMF economists do not understand very well the importance of technology and Schumpeterian economics and the dynamics of growth that arise with innovation and science.
When maturity mismatch between the debt of Germany and the rest of the world resulted in the collapse of the Austrian banks and then spread throughout the financial world of the time, it was determined that the solution lay in forming central banks to provide liquidity in periods of liquidity mismatch, especially for the agricultural sectors.
In the 1970s this approach led to the financing of the mismatch of the energy sectors founded on oil. In the 1980s this approach led to the financing of the mismatch of the property sectors in the US, especially Texas. In the 1990s this approach led to the financing of the mismatch of Asian economies advancing their trade to the US but unable to continuue with borrowing in the dollar. Mismatches occurred for
Brasil, Mexico, Argentina, and resulted in extreme social hardships in these economies as well as in Asia.
That there should be a maturity mismatch in the US housing market that feeds into the financial of the world economy begins with a targeting of the wrong inflation indices by the US banking authorities, who instead of long term inflation targeted short term inflation. As property values representing long term inflation demands increased the authorities turned a blind eye.
In the distant past, the trust and ethical ethos of management staff were sufficient to ensure that enormous mismatches of liquidity did not and could not occur. Come to the year 2010 and banks have evolved and inspections by reps of equity holders of their operations have become weaker because of financial liberalizations innovated under the umbrella of the IMF.
The VP or DMG that proposes the impossible is not laughed out of court, but taken seriously. Milton Friedman and John Maynard Keynes are weeping.
Unfortunately, the IMF Advisory departments and the Central Bankers are probably missing the practical experience needed and no authoritative persons understand the enormous structural risks of mismatched maturities and everything derived from the funds mismatched. Even worse, if the mismatch is structural and no-one watches out for it, almost certainly another enormous crash could occur. This has already happened recently. Reoccurence should come as no surprise. We have now to watch for the bounce or as they say, the Hicksian or Harrodian growth dynamics. I might also throw Lord Kaldor onto the fray!
My fear is a return of extreme right wing politics that could occur with social disintegration. Are we to watch the collapse of the IMF and UN as we did the BIS and League of Nations? The IMF does not realize it's impotency for such structural issues arising as they do from competitive situations it has itself created, though unwittingly!
I really do expect that as a result of financial market liberalization, and weak liquidity understandings at the IMF and World Banks, we have now systemic mismatches that will produce the continuous and inevitable eventual collapses of the international financial system until the mismatch is permanently and systemically at the core of it's structure, removed. Something to do with grains of sand piling up.
The OECD us the entity to address these issues of destructive competition between banks that will widen the mismatches. I do not think the IMF or World Bank have the inclination nor wherewithall!!
I do not see the IMF people and the type of staff they employ understanding what the problem is nor the central bankers. I can therefore predict the stupendous risky period ahead with the very real possibility of other major crashes and series of crashes in the international financial markets. These could destroy London, New York, Hong Kong, and Singapore as key financial centers as trust, the key ingredient of business disappears. I expect that it will necessitate the rebuilding of new structures systemically matched in maturities. So, don't be surprised when that happens!
Look for yourself and see if as a banker or historical economist you do not agree!
