Sunday, May 16, 2004

Keynes' Bancor +

Ah... Here's a few other economists thinking seriously about the international financial architecture. They not only have adopted Keynes' Bancor scheme, but also give a brief history of why it is necessary. I couldn't agree more. Too bad some other heavyweight economists, like Roach and Xie, wouldn't go public with their endorsement of the Keynes and Davidson plans, to solve our massive global imbalances, they both keep writing about. We need many economists jumping on this band wagon if we are to have any luck in salvaging what's left of poor ol' capitalism.

We are at the point we are because too many economists of the classical school have believed far too long in false equilibrium and speculation models of currencies and markets, that clearly do not work - though they stubbornly hang on. We need base our thinking on new real equilibrium models based on balanced ppp's, as best can be figured. Then maybe we can advance.

I am not advocating a pegged system. In the past, the only pegging I advocated was for the rest of the world to peg the yuan higher if the Chinese wouldn't act themselves, since it is drastically too low, and hurting everyone - including themselves. As to the system, I advocate a truly balanced floating system, but one that is balanced by law and central bankers figuring the proper ppp's to make their proper buy and sell orders, as market makers, to maintain a true ppp equilibrium, and thus avoid the drastic dis-equilibriums and imbalances of the present system, caused by the liquidity preferences of speculators, and traders' hoarding and dumping of inventories - leads and lags.

Financial Globalization and Regulation
by Philip Arestis, The Levy Economics Institute of Bard College, and Santonu Basu, London South Bank University

...We maintain that credible and transparent regulation, to support and manage a genuinely international single currency is paramount. Under current international institutional arrangements, the International Monetary Fund (IMF) can easily undertake this function. This could be implemented with very little cost, in terms of finance, non-human and human resources. A revamped IMF can manage such operation in order to prevent major financial crises through credible intervention, and help country lending and borrowing in a transparent way. It should not be compelled to lend by powerful members or by borrowers who threaten to default, a most prevalent experience currently. This could easily be achieved by establishing a truly independent IMF. Indeed, such regulation may embrace those aspects suggested by Keynes (1980) in his International Clearing Bank (ICB) proposals for the post
second World War II international financial order.

The main relevant elements of the ICB may be summarized: the establishment of a truly international central bank with the power to issue a single international currency, the Bancor in Keynes’s (op. cit., p. 72) terminology. The Bancor should be “fixed (but not
unalterable) in terms of gold and accepted as the equivalent of gold ….. for the purposes of settling international balances” (Keynes, op. cit., p. 72). The ICB should also be empowered to intervene in capital and financial markets to provide sufficient liquidity for the needs of international trade. National central banks would keep accounts with the ICB, so that normal banking “account clearing” can take place. The idea and the principles of the ICB are really very simple and are based on generalizing “the essential principle of banking, as it is exhibited within any closed system. This principle is the necessary equality of credits and debits, of assets and liabilities” (Keynes, op. cit., p. 72). Under these arrangements, the ICB “can with safety make what advances it wishes to any of its members with the assurance that the proceeds can only be transferred to the bank account of another member. Its problem is solely to see to it that its members behave themselves and that the advances made to each of them are prudent and advisable from the point of view of the Union as a whole” (Keynes, op. cit.,
pp. 72-73).

A revamped IMF, along the lines of the Keynes’ ICB would issue an International Clearing Unit (ICU) to serve as a medium of exchange and reserve asset. The ICB would issue ICUs in return for gold, dollar and other reserves of member central banks. ICUs should only be held by central banks, and in more general terms the ICB would operate as an institution which periodically would settle outstanding balances between central banks. The ICA would, therefore, be a “double-entry book-keeping clearing institution, providing overdraft facilities so that unused credit balances could be mobilized efficiently and effectively. It should be committed, along with member central banks, to guaranteeing one-way convertibility from ICU deposits to domestic money. ...Link

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