Wednesday, March 27, 2013

Krugman riles the free market ideologues

Barry Ritholtz noted on his blog today - Best Predictor of Financial Crisis: Huge Inflows of Foreign Money - that Paul Krugman's post on Monday, Hot Money Blues, has stirred up a lot of opposition. Here's the key part of Krugman's post:
But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.

It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.

What’s the common theme in these episodes? Conventional wisdom blames fiscal profligacy — but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.
Nothing there to disagree with here. But the real question is: Who has the cajones to take on the rich and force them to stop playing hot money games? I think Jon's little anecdote from this past Sunday is spot on:
"When I was a kid, an old farmer solemnly informed me that this is the primary lesson of Christianity. "Christ wanders a tiny area of the world healing the sick, making wine for weddings, comforting the oppressed, feeding the hungry, and teaching that the kingdom of God could be in each one of us. Nothing happens. But he starts messing with the moneychangers and they brutally executed him in less than a week on completely trumped-up charges."
Ritholtz included a great graph from Speigel that shows how much outside hot money is in Cyprus:

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