Good Morning Jay,
Currency boards are very useful tools. In a theoretical sense I am very much for them. The problem with them, in many cases, is the practical application. The most important requirement for a viable currency board is honesty. In the wrong hands a currency board just becomes a vehicle for the politically connected to abuse the system and to get their wealth out before a collapse. Many of the emerging economies that are in trouble are in that condition because of systems rife with cronyism and insider dealing. This is why I thought Hanke's prescription of a currency board for Indonesia wouldn't work. And a currency board in Russia, managed by the Russian political establishment, would be an unmitigated disaster. The best place for the application of currency boards would be in South America and a few select Asian countries.
As far as the emerging markets being destined to 'an exaggerated and never ending cycle of credit overexpansion and violent contraction'. If they go on the way many of them have, yes. But it is not necesarry. If the political leadership execises some vision they can get out of the trap. We will see international support packages and the institution of localized controls and restrictions. They have to stablize the situation. The long term tale will be told by what they do with the respite. If they use the time to institute real structural reforms then they will emerge much healthier. Think of it as a patient with a very high fever. Doctors will plunge the patient into ice to bring down the fever. This, however, is not a cure, the patient cannot live in the ice bath. But the doctors can use the time bought to aplly medication that will return the patient to health. If no, or the wrong, medication is given the patient will just deteriorate further and the ice will no longer help.
The emerging markets can make structural reform needed to advance their economies and they can use the strength and stability of the developed economies as a support. But only if they move on structural reforms in both their economic and legal institutions.
Henry |
