Debate with the audience

Question from the audience

It seems to me that whether we follow Paul Davidson’s advice to create an international clearing union, or John Eatwell’s to “upgrade” the IMF, or opt for some sort of international coordination, we have to face a trade-off, and we need to be very clear about it. We have a conflict between things that make the financial system apparently more efficient, maybe even more stable in the short run; but that undermine the resilience of the entire system. We need increased regulation, for instance we need to forbid certain kinds of financial transactions. This might reduce certain kinds of short-run efficiencies, and yet it is necessary to do that in order to protect the global resilience of our entire system. Anybody have any comments on that?

Paul Davidson

A comment about current account imbalances: the United States has 12 central banks. A bill might be issued from the Central Bank of Richmond, from the Central Bank of Philadelphia, etc. There are current account imbalances between them, but we don’t change the exchange rate between these dollars. How do we solve the problem? Roosevelt solved it very easily: by a progressive income tax where the surplus countries, because they’re growing income more rapidly, paid more taxes, and then they were spent in places like the Tennessee Valley, creating jobs over there.

Also, remember the old Savings & Loans. Initially, the Savings & Loans and most commercial banks could only service their local area, which they knew well. They knew who were the good loans and who weren’t good loans, and they had to worry about that. Then we suddenly said: you could service anything. A Savings & Loans in Princeton, New Jersey, would finance a golf course in Tucson, Arizona, knowing nothing about any of this; and this led to bad banking.

The financial system that I’m suggesting here, which is the equivalent of the international system, says that we stop at national borders and create a system where each nation has the incentive and the responsibility to create full employment and rising wages for its workers. We can do it without worrying about balance of payments problems, and without worrying about getting stuck with somebody else’s “toxic assets”. There’s no other way of solving those kinds of problems.

Luis Carlos Bresser-Pereira

You need to remember who is in charge, at least to some extent: the IMF. And the fact is that I don’t trust the IMF. I don’t believe that the IMF is there to regulate and put order in international finance in a way that would be profitable for all. It is controlled by rich countries, controlled very clearly in terms of stocks, and it represents the interests of these countries. And given the fact that cooperation among countries is essential, and that an organization like the IMF is necessarily the outcome of cooperation among countries, I believe that competition among countries is very strong. So we have to solve the problem of the legitimacy of the IMF, if the IMF is supposed to continue to exist.

Question from the audience

We have already seen trillions of dollars of wealth being wiped out, we are witnessing a collapse of incomes. This will have an enormous impact on the real economy and on people. Why did we permit the development of a financial sector which grew from somewhere around 10 percent of GDP in the 1960s, to somewhere around 20 percent today, and absorbed a great deal of our intellectual human capital? What did it give us in return, to the society as a whole? What does the financial sector do for us?

There are some obvious answers: it provides the currency. But that concerns the payment system, and the payment system is not necessarily connected to capital markets or the financial sector in general. Indeed, it is the process of securitization that has connected it to capital markets, and it is precisely what makes the present situation so dangerous, particularly with some $62 or $64 trillion of derivatives, some significant percentage of which are expected to lose value. That’s going to be a very big loss. So what are the services which the financial sector delivers to the rest of the society?

Luis Carlos Bresser-Pereira

What do financial markets do for us? I think that the Brazilian president Lula, a very intelligent man, responded to this question, saying that finances finance production. But of course, you have to finance economic activities and not speculation. What we have seen during the last decades was an enormous capture of wealth by predation, by the financial system. But part of this process was created by our way of measuring the wealth, profits and bonds and stocks of a country. There are measures that have nothing to do with production, like the number of transactions made one over the other. And what these measures showed for the last 20 years was an enormous increase in wealth. The GDP was growing in an abnormal way. All this seemed to make sense because the capitalists became richer thanks to their assets; but did the producers became much richer? Well, MBA golden boys and banks directors did. And the money they put in their pockets was quite real. What I mean is that when you discuss regulation, you should not only discuss how to prevent future crises; you should think how to make it less socially acceptable, how to make it more difficult for the financial sector to capture the resources from the rest of the society.

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