"The Global Crisis and the Implications for Developing Countries and the BRICs: Is the B Really Justified?"

The term BRIC was first coined by Goldman Sachs and refers to the fast-growing developing economies of Brazil, Russia, India, and China--a class of middle-income emerging market economies of relatively large size that are capable of self-sustained expansion. Their combined economies could exceed the combined economies of today's richest countries by 2050. However, there are concerns about how the current financial crisis will affect the BRICs, and Goldman has questioned whether Brazil should remain within this group. Senior Scholar Jan Kregel reviews the implications of the global crisis for developing countries, based on the factors driving global trade. He concludes that there is unlikely to be a return to the extremely positive conditions underlying the recent sharp increase in growth and external accounts. The key for developing countries is to transform from export-led to domestic demand-led growth, says Kregel. From this viewpoint, Brazil seems much better placed than the other BRIC countries.

The Brazilian Crisis: From Inertial Inflation to Fiscal Fragility

This paper documents the employment disadvantage faced by the less qualified part of the labor force and examines the factors that influence the differing extent of this disadvantage across OECD countries. We argue that employment rates for quartiles of the population ranked by educational qualification provide the best measure of employment disadvantage. We show that differences in these employment rates for the most- and least-educated quartiles vary substantially within Europe, but are not on average higher than those in the USA. The least qualified suffer the greatest employment disadvantage in countries in which the overall employment rates are low and, for men, the literacy test scores for the least qualified are relatively low. A high level of imports from the South appears to be associated with greater employment disadvantage, but there is no discernible tendency for a high level of wage dispersion, low benefits, or weak employment protection legislation to be associated with greater employment disadvantage. Labor market flexibility has not been the route by which some OECD countries have managed to minimize the employment disadvantage of the least qualified.

"A Simple Proposal to Resolve the Disruption of Counterparty Risk In Short-Term Credit Markets"

The impaired risk assessment caused by the collapse of mortgage-backed securities is the major problem threatening the stability of the American financial system, yet it is not clear that removing these assets from institutional balance sheets, as the government has proposed, will make it easier to assess counterparty risk in short-term credit markets. Resolving the disruption of counterparty risk should be the first objective of policy, argues Senior Scholar Jan Kregel, since these markets provide basic liquidity support for institutions operating in the broader financial markets.

"An Alternative Perspective on Global Imbalances and International Reserve Currencies"

The stability of the international reserve currency’s purchasing power is less a question of what serves as that currency and more a question of the international adjustment mechanism, as well as the compatibility of export-led development strategies with international payment balances. According to Senior Scholar Jan Kregel, export-led growth and free capital flows are the real causes of sustained international imbalances. The only way out of this predicament is to shift to domestic demand–led development strategies—and capital flows will have to be part of the solution.

"No Going Back: Why We Cannot Restore Glass-Steagall's Segregation of Banking and Finance"

The purpose of the 1933 Banking Act--aka Glass-Steagall--was to prevent the exposure of commercial banks to the risks of investment banking and to ensure stability of the financial system. A proposed solution to the current financial crisis is to return to the basic tenets of this New Deal legislation. Senior Scholar Jan Kregel provides an in-depth account of the Act, including the premises leading up to its adoption, its influence on the design of the financial system, and the subsequent collapse of the Act's restrictions on securities trading (deregulation). He concludes that a return to the Act's simple structure and strict segregation between (regulated) commercial and (unregulated) investment banking is unwarranted in light of ongoing questions about the commercial banks' ability to compete with other financial institutions. Moreover, fundamental reform--the conflicting relationship between state and national charters and regulation--was bypassed by the Act.

"Nurkse and the Role of Finance in Development Economics"

Ragnar Nurkse was one the pioneers in development economics. This paper celebrates the hundredth anniversary of his birth with a critical retrospective of his overall contribution to the field, in particular his views on the importance of employment policy in mobilizing domestic resources and the difficulties surrounding the use of external resources to finance development. It also demonstrates the affinity between Nurkse's theory of mobilizing domestic resources and employer-of-last-resort proposals.

"Is Reregulation of the Financial System an Oxymoron?"

The extension of the subprime mortgage crisis to a global financial meltdown led to calls for fundamental reregulation of the United States financial system. However, that reregulation has been slow in implementation and the proposals under discussion are far from fundamental. One explanation for this delay is the fact that many of the difficulties stemmed not from lack of regulation but from a failure to fully implement existing regulations. At the same time, the crisis evolved in stages, interspersed by what appeared to be the system’s return to normalcy. This evolution can be defined in terms of three stages (regulation and supervision, securitization, and a run on investment banks), each stage associated with a particular failure of regulatory supervision. It thus became possible to argue at each stage that all that was necessary was the appropriate application of existing regulations, and that nothing more needed to be done. This scenario progressed until the collapse of Lehman Brothers brought about a full-scale recession and attention turned to support of the real economy and employment, leaving the need for fundamental financial regulation in the background.Financial Regulation; Financial Crisis; Subprime Crisis; Mortgage Affiliate Regulation

"The Natural Instability of Financial Markets"

This paper contrasts the economic incentives implicit in the Keynes-Minsky approach to inherent financial market instability with the incentives behind the traditional equilibrium approach leading to market stability to provide a framework for analyzing the stability induced by the recent changes in bank regulation to modernize financial services and the evolution of financial engineering innovations in the U.S. financial system. It suggests that the changes that have occurred in the profit incentives for bank holding companies have modified the provision of liquidity to the financial system by banks, and the way credit assessment has moved from banks to other actors in the system. It takes the current experience in financial instability created by the expansion, through securitization, of the mortgage market as an example of these changes.

"Will the Paulson Bailout Produce the Basis for Another Minsky Moment?"

As the House Committee on Financial Services meets to hear the expert testimony of witnesses concerning the regulation of the financial system, the measures that have been introduced to support the system are laying the groundwork for a new domestic financial architecture. Hyman Minsky suggests that the basic principle behind any reformulation of the regulatory system should limit the size and activities of financial institutions, and should be dictated by the ability of supervisors, examiners, and regulators to understand the institutions' operations. Following Minsky's preference for bank holding company structures, Senior Scholar Jan Kregel proposes the creation of numerous types of subsidiaries within the holding company. The aim would be to limit each type of holding company to a range of activities that were sufficiently linked to their core function and to ensure that each company was small enough to be effectively managed and supervised.

"Some Simple Observations on the Reform of the International Monetary System"

The demand for reform of the financial system has focused on the dollar's loss of international purchasing power (the Triffin dilemma) and its substitution by an international reserve currency that is not a national currency. The problem, however, is not the particular asset that serves as the international currency but rather the operation of the adjustment mechanism for dealing with global imbalances. In a preliminary report issued in May, the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System made clear that the international system suffers from an inherent tendency toward deficient aggregate demand, a reflection of the asymmetry in the international adjustment mechanism. Even the simple creation of a notional currency to be used in a clearing union (proposed by Keynes) cannot do this without some commitment to coordinated symmetric adjustment by both surplus and deficit countries. Thus, the first steps in the reform process must be (1) to offset the balance sheet losses caused by the collapse of asset values and (2) to provide an alternative source of demand to replace the U.S. consumer and an alternative source of finance to offset the deleveraging of financial institutions. This can be done through the coordinated introduction of traditional, countercyclical deficit expenditure policies, on a global scale.