Speech: Richard Koo - Japan's Recession & Lessons for Today

The Holy Grail of Macroeconomics: Lessons from Japans Great Recession by Richard Koo

Richard Koo's "Holy Grail" is definitely on my wish list and I will definitely get to it before the end of this year (2010). He has a fascinating proposal that the 15 year recession in Japan was in effect was a "balance sheet recession" whereby asset prices and property prices dropped dramatically giving companies more liabilities than assets on their balance sheet. However, he argues the cash flow of these companies were still good so even though they were effectively bankrupt, they were still able to pay down their debts and it took them 10 years to pay off their debts. He argues (at least in the speech below) that this was the responsible thing to do. The speech below I believe covers a lot of the issues in the book very briefly. He comes accross as very sensible and rational economist and someone worth listening too for, at the very least, very engaging perspectives on Japan and also for the lesson we can learn for today.

I have embedded two speeches. The first is 10 minutes long and covers the essential ideas. The second one is a little more detailes in putting these issues in a global context.

You can buy from Amazon @ The Holy Grail of Macroeconomics, Revised Edition: Lessons from Japans Great Recession

New Purchase: Asian to Global Crisis - Sheng

From Asian to Global Financial Crisis by Andrew Sheng

I just picked up a copy of this book today at PageOne in Taipei 101. Am looking to try to understand the current financial crisis we currently find ourselves in. The book looks like a pretty detailed account by a central banker in HK who was in the middle of the Asian financial crisis way back in 1997. I remember when I first came to Taiwan to teach English at the end of 19998 many teachers had fled Korea due to the currency collapse at that time. It seems so long ago though now and seems to have been swept aside in terms of people memories as to what caused it and where it came from. I decided to buy the book as it seems to link the gap between the crisis then and the crisis now and will hopefully help to explain how the crisis developed and grew. Sadly though this is on the back of a long list of books I am currently catching up on (and some of them are pretty lengthy). Hopefully I can get to this one in a month or so. I am looking forward to it. Should be a good read.

You can read the first chapter on at the Amazon.com prodcut page linked below.

Buy from Amazon @ From Asian to Global Financial Crisis: An Asian Regulator's View of Unfettered Finance in the 1990s and 2000s

Lords of Finance - Ahamed

The Lords of Finance by Liaquat Ahamed - 5/5

The Lords of Finance tracks the history of the world’s four most influential bankers during the inter-war period from 1918 to 1939. The book gives a good introduction to each banker, explores their background, how they rose to their position and attempts to identify the motivations for their policies and decisions. Each central banker no doubt made serious misjudgments at the time and it was these misjudgments (which mostly revolved around the gold standard and the flow of gold between nations) that led to the great depression. Ahamed is careful to explain how the gold standard operated; the reasons and credit policies that influenced the flow of gold into and out of each country, why the possession of gold was so critical to each country and how this affected currency strength and the greater economy. The easily understood explanations of the complexities of global finance, macroeconomics and the insights into the mystical world of central banking are indeed the greatest strengths of this book. The other amazing revelations in The Lords of Finance are how the arrogance and egos of a small group of men precipitated one of the greatest financial catastrophes of all time that had severe and lasting consequences.

Ahamed starts by introducing each of the four main protagonists: Montagu Norman, Benjamin Strong, Hjalmar Schacht and Émile Moreau. Each chapter is a colorful introduction to the lives of each man: their ambition, their personality, their background, their emotional makeup, their frailties and the significant events in their lives that influenced their decision making processes throughout their careers. Throughout these chapters (and indeed throughout the book) Ahamed introduces many supporting characters (e.g. Maynard Keynes) and at each point is careful to provide color and purpose to each person’s life enabling the reader to connect with each character no matter how big or insignificant and makes the world of finance seem a little more human.

The book moves on to look at the catastrophe of the reparations demanded by the allies after the fall of Germany, the idiotic egos and the ignorance that demanded Germany pay exorbitant reparations after World War 1. The collapse of the German economy and the hyperinflation that nearly bankrupted the country and how this affected Europe and the people of Germany at the time and how countries such as England and the US were unable to assist Germany because the central banker at the time, while being a well intentioned man, was clearly not sufficiently educated. Ahamed also looks at the economic conditions in America during the roaring 20s and the stagnation of the UK economy at the same time. Ahamed is careful to outline how each country returned to the gold standard in their own time and how this decision led to France becoming the premier economy in Europe. He then traces how returning to the gold standard at pre-war rates continued to deflate and depress the UK economy. Ahamed also outlines how the flow of gold into the US led to easy credit and how the rapid bubble that grew in the US stock market and how the New York fed and the US Treasury were at odds with each other as to how to control the bubble. The book then documents the sudden collapse of the stock market in New York, the collapse of banks in Europe and the global implications of the depression in the 1930s and how the only way countries could come out of it was to come back off the gold standard. Of course, Ahamed is also careful to note how the collapsing economy in Germany led to the rise of Hitler in Germany and of course, the consequences of Hitler’s rise are known to all.

Ahamed spends much of the book detailing the reasons why the bankers all wanted to return to the gold standard. According to him this was almost a theological necessity for them. They didn’t have any other way of thinking about money. Money needed to have a base from which it could derive its own value and not be assigned value by fiat. For the bankers this was the only alternative. Of course Ahamed is quick to note Keynes’ criticism of the UKs return to gold and throughout the book lauds Keynes for his insights and in the way Keynes always seemed to get things right on issues like reparations and the gold standard.

Ahamed’s book is highly relevant in today’s world. Reading through some of the events that led up to the great depression is like reading a newspaper on the credit crunch that crushed the world in 2007 & 2008 and that led to the collapse of Lehman Brothers and Bear Sterns. Ahamed admits that the release of his book during the latest financial crisis was serendipitous. It’s a wonderful read, highly recommended and extremely relevant in today’s world. The best way to sum up the work of the four bankers described in the book and what they achieved would be to quote Montagu Normans diary from the book: “As I look back, it now seems that, with all the thought and work and good intentions, which we provided, we achieved absolutely nothing…nothing that I did, and very little that old Ben did internationally produced any good effect – or indeed any effect alt all except that we collected money from a lot of poor devils and gave it over to the four winds.”

Buy from Amazon @ Lords of Finance: 1929, The Great Depression, and the Bankers who Broke the World

Speech: Martin Wolf - Globalization

Why Globalization Works by Martin Wolf - 4/5

I read this book last year. It is an elightening overview of the issues that surround globalization and the consequences of liberal economies and democracies. The concepts are interesting with Wolf arguing that the world now is not as globalized as the late 19th century world. He gave a talk at Yale Unviversity on the issue. I have embedded the speech below which outlines some of the themes in the book. My review is @ Why Globalization Works - Wolf

The speech is pretty good and well worth the watch. At 84 minutes though it is long so its good to listen to at work. Unless you really want to see his slides. It is interesting to note that the Professor who introduces Wolf says that Wolf's book on the topic is the best book that has been written on the topic to date and has even made it required reading for one of his courses. I viewed it more as a laymans introduction to the topic. I know students will be able to benefit greatly from it, especially those who wish to move into a career in macro-economics.

Would love to know your thoughts. Comment is free.

Buy from Amazon @ Why Globalization Works (Yale Nota Bene)

Why Globalization Works - Wolf

Why Globalization Works by Martin Wolf - 4/5

Why Globalization Works (WGW) presents clear and concise arguments as to the benefits of globalization and the need for a more integrated global economy. "Globalization," says Wolf "is no fanatical ideology, but a name for the process of integration, across frontiers, of liberalizing market economies at a time of rapidly falling costs of transport and communication." Wolf is clearly aware of the pros and cons of both sides of the argument and while he is not shy to agree with criticism of current globalization methodologies, he is also not afraid to reject anti-globalization claims on the negative impact of economic integration.

Wolf's main thesis is that liberalization of the global economy has lifted more people out of poverty in the past few decades than ever before in history. To support these views Wolf relies strongly on evidence from South and East Asia (China and India) to support his claims that globalization works. He also draws a lot on South American economies when explaining failures in different economies. It would have been interesting to see some deeper analysis of economies in Eastern Europe and specifically Russia that, layman such as myself, understand to have purportedly had a market economy for nearly two decades now.

The most powerful chapters in WGW are those where Wolf defends globalization against the criticism of the myriad of interest groups that are opposed to an integrated economy. Some of these criticisms include claims that globalization has a negative impact on the environment (at the local level he shows it actually improves the environment) and that localization is better (which Wolf argues is actually more dangerous than globalization since being able to purchase food anywhere in the world provides states with more security than if they were relying their own crops at home).

For me his most eye opening defense was against critics of child labor and the so called sweatshops that transnational companies use in the developing world. Wolf argues that to prevent child labour in these countries would border on the criminal and suggests critics in rich countries compare the plight of the poor to the alternatives they have in their own countries rather than the alternatives in the countries where victims suffer extreme poverty. Wolf suggests that child labour in multi-national companies enhances the livelihoods of these countries and suggests that if they were not employed in these companies with comparatively high working standards (when compared to local companies) these children would work find work in more dangerous, local factories, starve or become child prostitutes.

The same is said of the working conditions in labor intensive industries where companies have been accused of employing people in sweatshops. Wolf argues that many of those employed are women and this provides them with status and independence in patriarchal societies and provides them with freedoms they never previously had. He also argues these types of practices are pulling these people out of the grip of extreme poverty.

Although Wolf clearly advocates globalization, he is not averse to challenging some of the assumptions, pitfalls and difficulties in the way globalization has been implemented. For example, even though he argues that liberalization of capital accounts is probably a good thing, he acknowledges that done incorrectly and without proper consideration, the system can tank and lead to both economic and fiscal crisis. Wolf also finds it disgraceful that rich countries levy disproportionate costs on poor countries who wish to export goods and services into developed markets. He argues that rich countries do not impose such high costs on each other and argues these actions inhibit economic growth in the poorest nations on earth.

Why Globalization Works is a great introductory book on the topic. It is well structured, well argued, covers all the bases and answers many of the critics' questions. Wolf has compiled an impressive array of data to support his views and the critics would need to counter with equally compelling evidence. Added to this the book is well written and fairly accessible. WGW just may be, to quote the Economist, "the definitive treatment of the subject."

Buy from Amazon @ Why Globalization Works (Yale Nota Bene)