Pernicious cultural norms inside American banks and regulatory
agencies have crowded out fundamental moral principles. Ed Kane proposes
an antidote.
Does the question of morality have a place in the realm of banking and
regulation? That it feels awkward to even raise the issue is convenient
for bankers who engage in reckless and harmful activities every day
without fear of punishment.
Ed Kane,
Professor of Finance at Boston College, believes it’s vital to discuss
moral questions, in plain English, without abstractions. Following his
own advice, he is blunt in characterizing some of the behavior in the
banking industry in recent years: “Theft is a forced taking of other
people’s resources,” he says. ‘That’s what’s going on here.” Kane urges a
deep inquiry into our culture to understand why bankers so commonly get
away with crimes in the United States.
In 2007, just before the housing bubble burst, Goldman Sachs chief
Lloyd Blankfein wrote to a colleague to discuss how the bank could deal
with toxic mortgages — ”
cats and dogs”
as he called them — on the books. Blankfein’s bank went on to sell the
toxic junk to unwitting investors who were told they were sound, while
taking short positions on the very same securities. As the Financial
Crisis Inquiry Report noted,
one structured finance expert compared Goldman’s practices to “buying
fire insurance on someone’s house and then committing arson.”
Still, Blankfein and his fellow bankers later pocketed billions of dollars from the American people in the form of a
bailout. They profited at the expense of their clients and society. Nobody went to jail.
In Kane’s view, the word “should” — used in the moral sense — needs to
be reinserted into the vocabulary of bankers. Today’s executives may
spend a lot of time considering the question, “Could we get away with
it?” but there is little focus on the question, “Is it right to do it?”
In a new paper for the Institute for New Economic Thinking, ”
Ethics vs. Ethos in US and UK Megabanking”
Kane argues that when bankers make reckless and harmful choices while
counting on unlimited taxpayer support to bail them out, they are
plainly stealing. He calls it “theft by safety net.” Through the safety
net, Kane explains, big banks demand that the public provide protection
and relief from distress. They put great pressure on the government,
which acts as a middleman in the robbery, just as in a “protection
racket.” As Kane puts it, “the government then, by dint of its
authority, takes the money from hapless taxpayers.”
Why is this not considered a crime? Because, says Kane, politicians
nearly everywhere are bought off by bankers. Plain and simple. The
regulators who might intervene are more worried about their careers and
hopping through the revolving door between government and the industry.
In Kane’s view, pernicious cultural norms within banks and regulatory
agencies have crowded out fundamental moral principles. Regulators in
both the U.S. and the U.K. are fully aware that the reckless pursuit of
profits is one of the main reasons for the expanding scale and frequency
of financial crises over the last 50 years, but they tend to approach
the issue differently.
Kane sees things as much worse in the U.S., where, he observes,
authorities are stuck on the idea of toughening corporate-level rules:
capital and liquidity requirements, corporate fines, periodic stress
tests, and so-called living wills. That’s not enough, says Kane. The
British have done this, but they have also supplemented corporate
restraints and punishments by defining a new crime called “reckless
misconduct leading to the insolvency of a bank.”
Besides that, Kane notes, it has been long been illegal in the U.K. for
an individual director to allow a corporation to issue new debt if he
or she knew or should have known that the firm was insolvent. In the
U.S., Dodd-Frank Act allows a limited clawback of stock-based bonuses in
the wake of a bank failure, but it does not make individual bankers
criminally responsible for actions that they should have known were
reckless. Prosecutors typically settle lawsuits and bankers find ways to
put taxpayers on the hook.
In the U.S., Kane argues, the
Dunning–Kruger effect
— a cognitive bias named for two Cornell researchers in which people
can’t recognize their own weaknesses — compounds the problem. If you
don’t recognize your inability to make sense of things using an ethical
code, for example, then how can you overcome the shortcoming? Part of
the problem is that ethical codes have to be taught and practiced.
“College education in the U.S. has been much more watered down,”
observes Kane. “In the U.K., people still have some training in
philosophy that helps them to see the ethical implications of their
actions.”
Philosophy for financiers? Yes, says Kane. “When I present these ideas
in Europe, I get much more enthusiastic reception than in the U.S.,
where people have this relativistic view of ethics.” He argues that in
America, there is a common perception that whatever feels good at the
moment must be okay and that this kind of thinking justifies nearly any
behavior. “Kant is still a force in modern philosophy,” says Kane, “and
he tries to develop an objective, non-theological reason for not hurting
other people.” Hurting others to please yourself, says Kane, is the
essence of theft. It’s a problem caused in part by ethical blindness.
“The regulators in the U.S. just don’t see things ethically,” notes
Kane. “They see that they have tools, and they can do things with them
to help them weather a crisis. They use the tools to put taxpayers in
the hole. Even worse, this behavior worsens booms and busts and
misallocations of resources that leave a lot of people unemployed when
the bubble breaks. I’ve looked regulators in the eye and they tell me
they just don’t get it — they don’t see the transfer of value to fat
cats that bailouts entail through an ethical lens. They view it through
the norms of their employer.”
A code of ethics, says Kane, is what connects us. Acting in one’s self
interest may be the mantra of capitalism. But the self is not an
autonomous unit; it is connected to other selves, as Kant emphasized:
“Kant says that you can’t escape that connection,” says Kane. “Think of a
couple in love. The other person’s happiness is part of their own.” On
the other hand, “narcissistic individuals don’t see themselves as
connected. They do whatever makes them feel good in the moment and are
unconcerned about the fallout.” That, says Kane, is a dangerous way of
thinking and at odds with thousands of years of thinking about how to
approach morality. “All religions deal with that in not terribly
different ways. It can’t be right to make yourself happy by hurting
someone else.”
As Kane sees it, holding accountable the individual, rather than the
corporation, is hugely important to dealing with crimes in the banking
industry. “Individuals are the ones who act recklessly,” he points out.
“Banks don’t act recklessly.” The punishment of the individual is not a
matter or revenge of retribution, it is about deterrence.
Kane believes changes are needed in the culture of banks and regulatory
agencies, but of course by the time people enter jobs in those
institutions, they are already well into adulthood and their ethical
frameworks have already taken shape. Is it too late?
“It really gets down to our family structure,” says Kane. “Many
children are not being disciplined. They’re not learning about their
obligations to other people. They’re learning only about the obligations
of other people to them. When they sense that their parents are lying
and cheating, well, it’s seen simply as a betrayal.”
The educational system in the U.S. doesn’t help. “The thing that our
schools teach better than anything else is how to copy. Who to copy
from. How to get away with it,” says Kane. Getting stu
dents to think about ethics is about more than
simply adding an ethics course to the curriculum. It’s about changing
the incentives: “What people teach in ethics is the history of ethical
theory. They don’t teach operative ethics.”
Kane believes that students need to be taken through numerous real life
scenarios in which they can apply ethical principles. In business
schools, students get bombarded with case studies in which they look at a
company, identify a problem such as poor sales, and try to figure out
how to solve it. But, he argues, they need to go through well-designed
ethical case studies. When your bank holds toxic mortgages, what should
you do? What would Kant’s model suggest that you do? What does the
Golden Rule indicate as a course of action?
According to Kane, no amount of policy tweaks or added regulatory staff
can solve this basic problem of ethics and cultural norms. There is no
way around the necessity of inculcating an ethical perspective on the
choices we make.
In the sixties, the U.S. government ran a
secret project to look for gold in the oddest places: seawater,
meteorites, plants, even deer antlers. ILLUSTRATION BY CYNTHIA KITTLER
In
September of 1965, Joe Barr, a Treasury Department official with a long
history in government, agreed to meet with a group of members of
Congress from Western states. He knew what to expect. Earlier that year,
he had met with the same group, and endured its ire over the Treasury’s
reluctance to help the American gold industry. After the Second World
War, world leaders had met at Bretton Woods, in New Hampshire, and, as
part of an agreement on an international monetary system, had fixed the
price of gold at thirty-five dollars an ounce. This had, predictably,
depressed the U.S. mining industry, even as the demand for private gold
shot up. The more easily obtained sources of gold had been depleted over
the years, while harder-to-reach sources became more difficult to mine
profitably, given the static price. Foreign competition—chiefly from
Canada and South Africa, where mines were less depleted and labor costs
were lower—was far more intense by 1960 than it had been after the war,
when the price of gold was set. The United States was a distant third in
gold production. Rather than attempt to compete, many mines simply shut
down.
Politicians from Western
states, where most gold was mined in the U.S., considered this an
economic crisis, and by 1965 they had lost their patience. Nineteen
Senators—including influential Democrats like Frank Church, Henry
(Scoop) Jackson, Warren Magnuson, and George McGovern—signed a blunt
letter to President Lyndon Johnson accusing him of letting America’s
gold industry die. Gold, they said, “is the only commodity held down to a
price established 31 years ago and compelled to sell only to the
imposer of this strangling restriction—the Federal government.” (Since
the nineteen-thirties, Treasury was the only domestic entity that could
legally buy investment gold.) Badly needed reform, they added, was being
blocked by Treasury’s “negative attitude.” These words were just short
of a threat that the senators would take action on gold with or without
the Administration’s support. It was in this atmosphere, which Barr
described as “more heated than usual,” that he trekked to Capitol Hill
that September day. Barr later said that at the meeting he had “a stroke
of inspiration.” Instead of maintaining the government’s hard line, he
suggested that “possibly the Government could assist in this area by
some sort of an R&D approach in the discovery of deposits and in the
extraction processes.” It wasn’t the price increase the Western
senators hoped for, but it pleased them nonetheless.
Barr
and a colleague then went to see Donald Hornig, who was Johnson’s
science and technology adviser and one of the most accomplished American
scientists ever to occupy a position of political power. Hornig had
worked on the Manhattan Project. He also worked on the space program and
was an expert in ocean-desalination technology. Responding to
Treasury’s inquiry about gold research, Hornig asked the Geological
Survey and the Bureau of Mines for a study, and word came back that,
yes, “there is indeed an opportunity to secure significant quantities of
additional gold production in the United States within the $35 an ounce
price limitation.” The solution seemed simple enough: deploy
state-of-the-art technology to detect gold and then extract it.
Thus
began a strange, untold episode in modern American history. In the
mid-to-late nineteen-sixties, as gold’s role in the international
monetary system was about to implode, a handful of top Johnson
Administration officials, a few sympathetic members of Congress, and
hundreds of government-paid scientists set off on a nuclear-age
alchemical quest. Barr gave it the code name Operation Goldfinger. The
government would end up looking for gold in the oddest places: seawater,
meteorites, plants, even deer antlers. In an era during which people
wanted badly to believe in the peaceful use of subatomic energy, plans
were drawn up to use nuclear explosives to extract gold from deep inside
the Earth, and even to use particle accelerators to try to change base
metals into gold.
Operation
Goldfinger represented the logical culmination of a government obsession
with not having enough gold. The post-war global economy was expanding
much faster than the gold supply that propped it up. Dollars freely
convertible to gold were the underpinning of the world’s monetary
system, and President John F. Kennedy—and many others—feared that if
holders of dollars and other U.S. securities were to cash in their paper
for gold, there wouldn’t be enough gold to exchange, and a global
crisis could ensue. In a private 1962 conversation with the chairman of
the Federal Reserve, Kennedy framed the shortage of monetary gold
starkly: “My God, this is the time . . . if everyone wants gold, we’re
all going to be ruined because there is not enough gold to go around.”
Against
such fears, which continued through the Johnson Administration,
Goldfinger’s promise was irresistible. If the predictions made by Hornig
and Treasury officials in early 1966 were to come true, the initial
investment of a few million dollars would, in just a few years, look
like the bargain of the century. A sunny Hornig wrote to President
Johnson in February, 1966, “It appears by spending from $10 million to
$20 million per year we stand a good chance of adding several billion dollars
to our gold reserves at the present price. With luck it might be much
more.” Treasury’s general counsel asserted that “the President’s
scientific advisers are confident of the success of the program [and]
estimate that new gold reserves valued at up to $10 billion could be
expected within five years.” That amount—ten billion dollars—was more
than five times the volume of gold then produced annually worldwide.
Goldfinger, to its enthusiastic backers, wasn’t like discovering some
new gold mine—it was like discovering a new planet.
While
the Johnson Administration sparred with Congress over seemingly basic
issues like passing a tax bill, there was nonetheless consensus between
the executive branch and a handful of congressmen to disguise Operation
Goldfinger as a broad-based metal-mining program. There were several
motivations for secrecy: no actual funds, for example, had been
appropriated for government gold-hunting. A push for secrecy also came
from the Federal Reserve chairman William McChesney Martin, who was
concerned that “we simply do not know how foreign central banks would
interpret this move.” As Barr wrote to his boss, the Treasury Secretary
Henry Fowler, “There is general agreement among those I talked to that
this program should be wrapped up in a search for all minerals. They
advised us (the Treasury and the Administration) to deny or refuse to
comment on any leaks . . . and to stick with the cover story of a search
for minerals in short supply in the United States.”
Operation
Goldfinger took the form of hundreds of research projects designed to
find gold in places likely and very unlikely. The Roberts Mountains in
north central Nevada had long seemed like a promising source of gold,
and samples from dozens of areas were taken to search for surface
minerals (such as limestone) known to be associated with gold deposits.
Other studies were long shots. For decades, various scientists had found
traces of gold in coal, and so the U.S. Geological Survey sifted
through coal in dozens of locations in Appalachia and the Midwest. The
government even took samples from coal ash and “coal-washing waste
products received from various industrial plants.” These did not yield
gold bonanzas. In the nineteen-forties in Czechoslovakia, scientists
reported finding gold in the herb Equisetum palustre, or marsh
horsetail. When government scientists collected twenty-two samples from
across the United States, however, they found gold concentrations well
below one part per million, and concluded, “Equisetum would not be useful in prospecting for gold.”
Much
of the project’s early enthusiasm was turned loose on funding
state-of-the-art gadgets. The U.S.G.S. developed truck-mounted
neutron-activation systems, one for detecting silver and one for gold.
“It is no longer necessary even to collect a sample, as long as a truck
can be driven over the spot that one wants analyzed,” a government
report boasted. The Bureau of Mines also worked on “a portable X-ray
probe that can be lowered into small diameter drill holes” to find gold.
James Bond would have been proud.
For
Operation Goldfinger, no scientific plan was too obscure to consider:
Is there gold in meteorites that hit the Earth? Is there gold in
Colorado peat? Is there gold in plants and trees? Is there gold in deer
antlers? In almost all cases, government scientists found that the
answer was yes—but not at quantities that even approached commercial
viability.
The ocean seemed an
especially promising area of exploration. The same geological forces
that created gold deposits in, say, California, were also at play under
the ocean floor, and preliminary sea-mining for gold was among the most
important projects under Operation Goldfinger. The U.S.G.S. contracted
with the University of Oregon, in 1967, to launch the Yaquina, a
research vessel designed to dredge sediment beneath the continental
shelf between Coos Bay, in Oregon, and Eureka in northern California.
The project, however, turned up minuscule amounts of gold.
Operation
Goldfinger’s ambitions did not stop at U.S. shores. An outside economic
adviser named Alexander Sachs managed to convince top Johnson
Administration officials to take seriously a plan to mine in Venezuela
for gold. Eugene Rostow, the State Department’s undersecretary of
political affairs, asserted to Treasury that “there is evidence of high
promise to justify a full feasibility study. . . . I suggest a Public
Corporation or Authority established by a Treaty between Venezuela and
the United States.”
Rostow’s
suggestion of international coöperation was all the more remarkable
because Sachs recommended not merely traditional gold mining but prying
gold out of the Venezuelan ground using nuclear detonations. During the
nineteen-sixties, many such experiments with underground nuclear
explosions were proposed—some were even carried out—primarily for
mining, drilling and land-moving purposes, under the auspices of Project
Plowshare, a program for the peaceful use of nuclear technology. From
Plowshare’s inception, in 1957, to its eventual demise, two decades
later, at least two dozen nonmilitary nuclear detonations were carried
out. The Venezuelan plan, however, never went forward.
Perhaps
Goldfinger’s most wide-eyed plan was to create gold out of other
substances. For hundreds of years, alchemists suspected that some metals
were structurally close enough to gold to be transformed into it, using
an elusive external process. Many scientists recognized that the
nuclear age had, in theory, provided the tools, and Sachs managed to
convince both Fowler, the Treasury Secretary, and Stewart Udall, the
Interior Secretary, to take up the modern alchemical cause. Fowler wrote
to the chief of the Atomic Energy Commission, Glenn Seaborg, “Because
of the implications of Dr. Sachs’s proposal for, among other things, the
present vexed international monetary situation, I am extremely anxious
that [an] assessment be made—and in the swiftest possible time.” Seaborg
acknowledged that “other elements near gold in the periodic table can
indeed be transmuted into gold by nuclear reactions,” but he also knew
the atomic science well enough to recognize that gold production by this
method would be ludicrously expensive, and he shot the plan down.
What
became of Operation Goldfinger? Most of the initial experiments were
one-offs. Some ideas—such as the reopening of a viable gold mine in
Cortez, Nevada—showed some success. Other projects were directionally
valid over the long term; Guyana and Venezuela, for example, produce
substantially more gold today than when Operation Goldfinger was eying
them in the late nineteen-sixties.
The
plans to use nuclear detonation for gold mining never became reality.
By the early nineteen-seventies, most government scientists had scaled
back their attempts to use nuclear detonations for earthmoving or
mining; opposition from activist scientists and the public became
pronounced, particularly as details of radioactive fallout were made
public.
In 2014, I interviewed
Francis Bator, an economist who worked in the Johnson Administration and
closely advised the President on international monetary policy, about
Operation Goldfinger. He implied that most of his colleagues did not
believe it would ever be a serious solution to the monetary-gold
shortage. “It was a gimmick. It was a sideshow,” he recalled. At best,
Bator said, Operation Goldfinger was designed as a show of force, a
psychological attempt to ease world markets by hinting that the United
States could tap new sources of gold if need be. These efforts might
serve to buy some time while the economists and diplomats in the
Administration could find a palatable way to decouple the dollar from
gold.
By 1968, Operation Goldfinger
had indeed acquired a propagandistic aspect. While the project had begun
in secrecy, results of individual projects were trotted out on occasion
for effect. For example, the Bureau of Mines made a public announcement
in March, 1968, about a “major technical breakthrough” that would
dramatically increase the amount of gold produced in the U.S. The
technique, an “aqueous chemical treatment” allowing more gold to be
extracted from certain ores, was promising, but had only been executed
in a Reno research lab; under the best of circumstances, it was years
away from commercial impact.
What
determined Operation Goldfinger’s fate, however, was not its lack of
results but the course of world events. The devaluation of the British
pound in late 1967 set off a series of gold-supply crises so threatening
to the global economic order that no one in the Johnson Administration
could afford to spend time thinking about how much gold was contained in
deer antlers. “In ’67, when the British got in all this difficulty,
everybody all over the world said, ‘I don’t want to hold paper money; I
want to hold gold,’ ” Barr later recalled. “We had to meet these
commitments, and we were losing gold at an enormous rate. So were all
our partners. Everybody was terrified, and the markets were just
convulsed all through late ’67 and early ’68. We couldn’t pass a tax
bill in the United States. The British had devalued. Everybody was just
petrified.” The long-feared currency crisis had begun. Within a few
short years, the Nixon Administration would be compelled to drop the
gold standard altogether, embracing what L.B.J.’s advisers had rejected
as “the nuclear option.” The transition, in 1971, to a dollar untethered
to gold was hardly smooth. But the long-term consequences were probably
healthier than sticking to a monetary system that made gold-mining
nuclear detonations seem like a good idea.
The headquarters of the African Union in Addis Ababa, Ethiopia.
Campaigners said illicit financial flows account for $68bn a year.
Photograph: Sean Gallup/Getty Images
More wealth leaves Africa
every year than enters it – by more than $40bn (£31bn) – according to
research that challenges “misleading” perceptions of foreign aid.
Analysis by a coalition of UK and African equality and development
campaigners including Global Justice Now, published on Wednesday, claims
the rest of the world is profiting more than most African citizens from
the continent’s wealth.
It said African countries received $162bn in 2015, mainly in loans,
aid and personal remittances. But in the same year, $203bn was taken
from the continent, either directly through multinationals repatriating
profits and illegally moving money into tax havens, or by costs imposed
by the rest of the world through climate change adaptation and
mitigation.
This led to an annual financial deficit of $41.3bn from the 47
African countries where many people remain trapped in poverty, according
to the report, Honest Accounts 2017.
The campaigners said illicit financial flows, defined as the illegal
movement of cash between countries, account for $68bn a year, three
times as much as the $19bn Africa receives in aid.
Tim Jones, an economist from the Jubilee Debt Campaign, said: “The
key message we want to get across is that more money flows out of Africa
than goes in, and if we are to address poverty and income inequality we
have to help to get it back.”
The key factors contributing to this inequality include unjust debt
payments and multinational companies hiding proceeds through tax
avoidance and corruption, he said.
African
governments received $32bn in loans in 2015, but paid more than half of
that – $18bn – in debt interest, with the level of debt rising rapidly.
The prevailing narrative, where rich country governments say their
foreign aid is helping Africa, is “a distraction and misleading”, the
campaigners said.
Aisha Dodwell, a campaigner for Global Justice Now, said: “There’s
such a powerful narrative in western societies that Africa is poor and
that it needs our help. This research shows that what African countries
really need is for the rest of the world to stop systematically looting
them. While the form of colonial plunder may have changed over time, its
basic nature remains unchanged.”
The report points out that Africa has considerable riches. South
Africa’s potential mineral wealth is estimated to be around $2.5tn,
while the mineral reserves of the Democratic Republic of the Congo are
thought to be worth $24tn.
However, the continent’s natural resources are owned and exploited by foreign, private corporations, the report said.
Bernard Adaba, policy analyst with Isodec (Integrated Social
Development Centre) in Ghana said: “Development is a lost cause in
Africa while we are haemorrhaging billions every year to extractive
industries, western tax havens and illegal logging and fishing. Some
serious structural changes need to be made to promote economic policies
that enable African countries to best serve the needs of their people,
rather than simply being cash cows for western corporations and
governments. The bleeding of Africa must stop!”
However, Maya Forstater, a visiting fellow for the Centre for Global
Development, a development thinktank, said the report did not provide a
meaningful look at the issues.
Forstater said: “There are 1.2 billion people in Africa. This report
seems to view these people and their institutions as an inert bucket
into which money is poured or stolen away, rather than as part of
dynamic and growing economies. The $41bn headline they come up with
needs to be put into context that the overall GDP of Africa is some
$7.7tn. Economies do not grow by stockpiling inflows and preventing
outflows but by enabling people to invest and learn, adapt technologies
and access markets.
“Some
of the issues that the report raises – such as illegal logging, fishing
and the cost of adapting to climate change – are important, but adding
together all apparent inflows and outflows is meaningless.”
Forstater also questioned some of the report’s methodology.
The coalition of campaigners, including Jubilee Debt Campaign, Health
Poverty Action, and Uganda Debt Network, said those claiming to help
Africa “need to rethink their role”, and singled out the British
government as bearing special responsibility because of its position as
the head of a network of overseas tax havens.
Dr Jason Hickel, an economic anthropologist at the London School of
Economics, commenting on the report, agreed that the prevailing view of
foreign aid was skewed. Hickel said: “One of the many problems with the
aid narrative is it leads the public to believe that rich countries are
helping developing countries, but that narrative skews the often
extractive relationship that exists between rich and poor countries.”
A key issue, he said, was illicit financial flows, via multinational
corporations, to overseas tax havens. “Britain has a direct
responsibility to fix the problem if they want to claim to care about
international poverty at all,” he said.
The report makes a series of recommendations, including preventing
companies with subsidiaries based in tax havens from operations in
African countries, transforming aid into a process that genuinely
benefits the continent, and reconfiguring aid from a system of voluntary
donations to one of repatriation for damage caused.
The Central Bank established a whistleblower desk to ensure that disclosures are dealt with appropriately
The number of whistleblowers coming
forward to the Central Bank has risen steadily since the introduction of
new protections for people making protected disclosures in August 2013.
According to figures arising from a parliamentary question submitted
by Fianna Fáil Finance Spokesperson Michael McGrath, the Bank
is currently dealing with around 50 whistleblower allegations.
There were 42 such disclosures made to the Central Bank's dedicated
whistleblower desk in 2014, with 49 in 2015, and 50 last year.
So far in 2017 there have been more than 40 disclosures made.
The Central Bank does not give a breakdown of the penalties imposed on foot of protected disclosures.
However, the regulator imposed fines totalling €12.05 million in
2016, the largest figure for fines imposed by the Bank in a single year
to date.
Last November, a fine of €4.5m was imposed on Springboard Mortgages for wrongly moving homeowners from low interest tracker loans.
Since 2006, 108 settlement agreements have been reached for regulatory breaches, with fines of around €57m imposed.
We simulate the impact on the Italian economy of withdrawal from the euro area.
•
The model endogenises sovereign spread dynamics and balance sheet effects.
•
Due to banking crisis, nominal realignment has short-run contractionary effects.
•
Reversing austerity policies allows growth to resume after the second year.
•
Results are robust to different types of adjustment, with and without overshooting.
Abstract
This
paper assesses the impact on the Italian economy of Italy withdrawing
from the euro area by means of stochastic simulations of a
macroeconometric model. The model considers the effect of devaluation on
output, sovereign debt valuation, and the development of bilateral
economic relations between Italy and its major trade partners. The
simulation results are consistent with the findings of recent applied
research: the Italian economy would follow the V-shaped pattern observed
in most currency crises. After an initial period of stress, and
provided an appropriate set of countercyclical policy measures is
implemented, real GDP would recover and resume growth at a reasonable
pace. In particular, while the expected positive impact of nominal
exchange rate realignment on external balance would be transitory,
higher nominal growth would bring about a persistent reduction in
unemployment and the public debt-to-GDP ratio. These results are robust
to a set of sensitivity checks, considering a number of adverse
circumstances such as exchange rate overshooting, financial panic,
supply-side constraints, and the application of retaliatory tariffs.
A long memorandum written in March 1974 by a U.S. State Department
official for Secretary of State Henry Kissinger and copied to future
Federal Reserve Chairman Paul Volcker, then the Treasury Department's
undersecretary for monetary affairs, describes the desire of the United
States and its options to prevent European countries from increasing the
use of gold in the international financial system.
The memo, titled "Gold and the Monetary System: Potential U.S.-E.C.
Conflict," was recently discovered in the State Department archive by
GoldMoney Vice President John Butler and brought to GATA's attention
this week by GoldMoney research chief Alasdair Macleod. It emphasizes
the longstanding U.S. government policy of subverting gold as a reserve
currency in favor of the Special Drawing Rights issued by the
International Monetary Fund, an agency then and now largely controlled
by the United States.
The memo's author, Sidney Weintraub, deputy assistant secretary of state for international finance and development, wrote:
"To encourage and facilitate the eventual demonetization of gold, our
position is to keep the present gold price, maintain the present
Bretton Woods agreement ban against official gold purchases at above the
official price, and encourage the gradual disposition of monetary gold
through sales in the private market.
"An alternative route to demonetization could involve a substitution
of SDRs for gold with the IMF, with the latter selling the gold
gradually on the private market, and allocating the profits on such
sales either to the original gold holders or by other agreement."
Weintraub copied his memo to Volcker just a month before Secretary
Kissinger met with his assistant undersecretary of state for economic
and business affairs, Thomas O. Enders, to hear a similar argument.
Whichever nation or group of nations controls the most gold, Enders
explained to Kissinger, can control the currency markets by changing
gold's value periodically. Thus, Enders said, replacing gold as an
international reserve with SDRs was in the interest of the United
States.
GATA often has called attention to a transcript of Kissinger's
conversation with Enders, which remains in the State Department's
archives: http://www.gata.org/node/13310
As GATA always pleads, if vainly, none of this stuff is mere
"conspiracy theory." It is extensively documented U.S. government policy
based on the most obvious national interest that endures to the
present, even if it can't be discussed in polite company, in financial
journalism, or even in the monetary metals mining industry, whose
crippling it ensures.
