National Governments, the IMF, and Blame

I was just reading a little bit about the Greek Economy and wanted to highlight the following observation about the IMF that ends up giving it a bad name for government's mistakes:

One key feature in all this woe has to be a political process that is extremely ineffective, and driven by the fact that no one likes to hear bad news, and that the last thing a politician is able to say is tighten-up your belts now lads and lasses, we are in for a rough ride. But isn’t this just how the IMF gets such a bad name for itself, since the IMF doctors get called in just where the domestic political process breaks down, and where local politicians haven’t the ability to stand up in front of their citizens and say, it’s going to have to be like this, I’m afraid. Isn’t this what just happened in Ukraine, Hungary and Latvia? And then people say, those “nasty folk” at the IMF, they cut pensions everywhere they go, and wages are down 8% in Hungary, and 15% in Latvia once the IMF get to run the show. That is the IMF make for a convenient scapegoat, but people seldom ask themselves why wages needed reducing, or why there is no money to pay the pensions.

Granted, there are other ways to reduce a deficit and the IMF might be biased on how it wants to cut deficits but the general point stands.

Should we have let them fail?

In a recent WSJ article Oliver Hart and Luigi Zingales suggest that since the main reason behind bailing out the likes of Bear Stearns and AIG because of worries about counter-party risk the government should have instead guaranteed those obligations:

[I]t suggests that the best way to proceed is to help third parties rather than the distressed company itself. In other words, instead of bailing out AIG and its creditors, it would have been better for the government to guarantee AIG's obligations to J.P. Morgan and those who bought insurance from AIG. Such an action would have nipped the contagion in the bud, probably at much smaller cost to taxpayers than the cost of bailing out the whole of AIG. It would also have saved the government from having to take a position on AIG's viability as a business, which could have been left to a bankruptcy court. Finally, it would have minimized concerns about moral hazard.

I'd be very curious to hear more about what others think about this proposal and how workable it would have been. How exactly would the government have guaranteed some of the complex obligations and what kind of risks would it have taken on by doing so? Would this have assuaged investors' concerns?

Lots of Reading, Little Blogging

During the beginning of the Financial Crisis I spent virtually all of my reading time focusing on current events and reading articles and research papers online. I now feel I have a much more solid background on what is going on and am focusing on reading books again and while I still keep up with everything that comes in through my RSS feeds things have definitely slowed down since the beginning of the crisis. I do have several unfinished blog posts that I will post in the days ahead and will update more regularly again once I get caught up on some reading that I had to delay in favor of reading online and blogging.

I recently finished George Soros' The New Paradigm for Financial Markets which was interesting as an insight into Soros' thinking (more about that in a later post) but did not really give me any new insight into the economic troubles. After that I decided it was time to make my way through all the China books that have been sitting on my shelf, starting with the Chinese Economy, both The Chinese Economy: Transitions and Growth and Rural China Takes Off were excellent reads that I recommend highly, Grassroots Political Reform in Contemporary China, a collection of research studies on reform was less interesting.

Next up were less academic accounts of China, China Inc. and China Road, the former of which was annoying and not very deep while the latter was beautiful and insightful. I was reading them both at the same time (one on audio, the other on paper) and it really made me realize how many 'popular books' try much too hard to seem important and be liked by the reader and thereby simply become exaggerated and boring. Rob Gifford, author of China Road, never tries to force you to appreciate his work but instead gives a wonderfully natural and fun to read account of his journey along Route 312. Now I'm reading The Cambridge Illustrated History of China and next up is Chinese Civilization to be followed by 3 books on Chinese Foreign Policy.

On the fiction side I recently read A Passage to India by E.M. Forster which I loved and which made me want to go back to India again. I was horrified and saddened by the recent attacks in Mumbai having spent three days there in January, relaxing from a hectic Journey through Northern India, but I would not hesitate to go back as early as a few weeks from now. One of my favorite blog posts about the events was this heartfelt post about how terror will never succeed and how our way of life will continue (found via A Fistful of Euros).

After enjoying A Passage to India this much I am now reading A Room with a View, after reading about it in a wonderful travel article on Florence in the NYTimes that references it heavily.

Finally, I want to say how much I've come to love Audiobooks - yes, they are slower than just reading the book myself but they allow me to 'read' while I'm driving to work or working out at the gym and therefore save a lot of time. I don't think I would have as much time to read fiction without them.