Eapen thomas's Library tagged Regulation →  View Popular

While the prevailing multilateral system will try to reconstitute itself, China will expand on a bilateral basis. China is, of course, part of the multilateral system but it does not occupy within that system a position that is commensurate with its current strength; therefore its participation in the international financial institutions is rather passive and its active expansion is likely to go through bilateral channels. For instance, China will complain about the role of the dollar and will promote the role of Special Drawing Rights but it is unlikely to allow the renminbi to become freely convertible because that would destroy the mechanism that has allowed the state to harvest the fruits of cheap Chinese labor through an undervalued currency. China will continue to maintain capital controls but will establish bilateral clearing accounts denominated in renminbi with countries like Brazil. This will diminish the status of the dollar as the international currency without replacing it.

Just as at the end of the Second World War, we are at the end of an era, but this time, we are not fully aware of it. Neither of the currently available alternatives is attractive. The Washington Consensus has failed. International capitalism in its present form has proven itself inherently unstable because it lacks adequate regulation. It is also highly unjust. It favors the haves over the have nots.

Whatever moment you pick for the Moment, we have since been traveling the reverse Minsky journey: moving backward through the three-part progression, with asset prices falling, risk premiums moving higher, leverage getting scaled back and economic growth getting squeezed. Minsky’s Ponzi debt units are only viable as long as the levered assets appreciate in price. But when the price of the assets decline, as we’ve seen in the U.S. housing market, Minsky tells us we must go through the process of increasing risk-taking in reverse – with all its consequences.

The recent Minsky moment comprised three bubbles bursting: in property valuation in the U.S., in mortgage creation, again, principally in the U.S., and in the shadow banking system, not just in the U.S. but around the world. The blowing up of these three bubbles demanded a systemic re-pricing of all risk, which was deflationary for all risk asset prices. These developments are, as Minsky declared, a prescription for an unstable system – to wit, a system in which the purging of capitalist excesses is not a self-correcting therapeutic process, but a self-feeding contagion: debt deflation.