Subject-wise classification of my economics articles

Strategies for economic recovery
The prospects for the current economic crisis leading to a prolonged deflation in prices
(December 26, 2008)

Comment on Professor Bradford DeLong's article, "Stimulus Ostriches"
(March 9, 2009)

Comment on Professor Joseph Stiglitz's article, "How to Fail to Recover"
(March 16, 2009)

Whatever happened to the Liberal Agenda?
(July 16, 2009)

A new perspective on the global economic crisis III: The Way Forward
(August 23, 2009)


Exchange Rate Policies for America and China
In partial response to Professor Kenneth Rogoff's January 2009 article, "Has America Lost its Mojo?"
(February 9, 2009)

In response to Professor Kenneth Rogoff's article, "Is China Really Immune to the Crisis?"
(February 19, 2009)

A new perspective on the global economic crisis II: Fear of Reverse-colonization Did It
(July 3, 2009)

Sorry to say that you are mistaken, Professor!
(August 3, 2009)

China's Dollar Opportunity
(October 14, 2009)

A better solution for the problem of accommodating China's rapid growth
(December 24, 2009)


Macro-economic theories
A new perspective on the role of markets in an economy
(March 9, 2008)

Update 3: Fire-sales, Bazookas and Hospitals
(September 8, 2008)

Comment on Becker-Posner blog responding to Professor Gary Becker's post
(November 12, 2008)

Some perspectives on the relevance of John Maynard Keynes to the modern economy
(December 20, 2008)

In response to Professor Kenneth Rogoff's article, "What is the Deficit Endgame?"
(April 1, 2009)

A Twist in the Tale
(July 25, 2009)

The Official Consensus
(September 30, 2009)

A new perspective on the global economic crisis IV: It is NOT the economy, stupid!
(November 2, 2009)


Mortgage crisis/Securitization
Update 1: Housing Example in Role of Markets
(April 8, 2008)

Sub: The completely unnecessary $700-billion market intervention plan
(September 24, 2008)

In response to the New York Times article, "Matters of Principle"
(March 14, 2009)

Some observations (in addition to Professor Krugman's criticism of the Geithner plan)
(March 22, 2009)

In response to Professor Stiglitz's article "The Spring of the Zombies"
(June 5, 2009)


Other Topics

Accumulation of Capital/Global Imbalances
FAQ on the current financial crisis
(October 8, 2008)

A new perspective on the global economic crisis
(June 17, 2009)

Financial Regulation
Online debate on the financial crisis at Economist.com
(October 20, 2008)

Mathematical Models
Update 2: A Marginalistic Interpretation of the GARCH model
(May 4, 2008)

A better solution for the problem of accommodating China's rapid growth

In his latest Project Syndicate article, "Making Room for China", Professor Dani Rodrik proposes an excellent idea for enabling the national economies of the world to accommodate the rapid growth of China. We analyze the implications of his proposal, by first assuming ideal circumstances in the geo-political arena. For this purpose, we consider China's imports, exports and domestic consumption using three different measuring units -- the total volume, the value in dollar terms and the value in yuan terms.

Professor Rodrik's proposal is that the World Trade Organization (WTO) relaxes its rules for China. As a result, over the course of the next few years, the Chinese government enacts a system of subsidies and other incentives to encourage its domestic industry. Presumably, these subsidies and incentives are directed towards keeping the price levels of those goods that China exports stable in dollar terms, and they do not directly affect wage levels (in yuan terms) of China's domestic consumers. Simultaneously, the Chinese government allows the Renminbi-yuan to appreciate in value against the dollar. Moreover, this appreciation against the dollar would also reverse the depreciations of the yuan against the other currencies of developing countries. Recall that these depreciations of the yuan had resulted from the dollar's recent depreciations against these other currencies, with the yuan pegged against the dollar.

The expected net effect on China's exports from these twin factors of industrial encouragement policy and currency appreciation is that these two factors would cancel each other out. Specifically, the total volume of China's exports follows the same growth path over the next few years that it would follow if there would not be any change in the dollar-yuan exchange rate and in China's industrial policy. Moreover, the value of China's exports in dollar terms as well as the value in yuan terms would also have followed the same growth path as the one that would have resulted with no change in the dollar-yuan exchange rate and in China's industrial policy.

On the other hand, the net effect on China's imports is a different story. Because of the yuan's appreciation against the dollar, foreign goods would be cheaper in China's domestic markets. Some high quality foreign goods that are used for business investments, construction, entertainment and health do not have direct substitutes among locally produced goods. Examples of such goods include heavy machinery, software, hi-tech gadgets, foreign cuisine, travel abroad and pharmaceuticals. Moreover, commodities like oil, metals and other inputs for industrial production would be cheaper. The import of these goods would increase more than otherwise, when measured in terms of volume as well as in dollars, even if in terms of yuans, the increase in spending on these imports would only follow the existing trend.

Next, to understand the implications of Professor Rodrik's proposal for China's domestic consumption, we classify the Chinese income-earners into three categories. The first category comprises of agricultural workers. These people reside predominantly in the rural areas. Their incomes are very low, and their consumption is only at the level of subsistence. Neither their incomes nor their consumption behavior would be affected, in any significant way, by the marginal changes in the exchange rate or industrial policy that are proposed by Professor Rodrik.

The second category comprises of the millions of workers who have recently migrated, say in the last five years, from the rural areas to the cities. These people have left behind their traditional jobs in agriculture. They are now invariably employed as factory-hands, semi-skilled laborers, skilled technicians, supervisors and in other jobs that require comparable skills. They are currently undergoing the process of 'learning-by-doing' in an industrial setting, in marked contrast to their earlier slow rhythm of agricultural work. Their income levels are showing rapid increases. Their expenses now are far higher than what their former rural lifestyles had accustomed them to. For example, rent, food and daily commute incur large expenses in the cities, whereas in the villages these facilities are practically free.

However, the consumption behavior of these people still displays a large degree of caution. These people spend only on what they think is essential. They are highly cost-conscious shoppers. The consumption of foreign goods would increase among these people, to the extent that some foreign-made goods are cheaper, than equivalent domestically produced goods, as a result of the yuan's appreciation. One would suppose that this situation would benefit China's neighboring developing countries that export low cost goods to China. However, it does not seem possible that when the whole of China's annual imports is considered, that this substitution of cheaper foreign goods, as a result of exchange rate changes, would be a major influential factor.

The third category of income-earners has had first hand experience of China's industrialization for many years now. These people form the upper levels of China's middle class. They are employed as factory managers, businessmen, bureaucrats, politicians, company executives and other positions holding comparable social status. They have the financial means to make down-payments on apartments, cars, motor-cycles, house-hold appliances and other durable goods. For these people, foreign goods add variety and luxury to their consumer experience. Cost-consciousness is not the deciding factor when its comes to consumption of foreign goods among these people.

Now, as mentioned above, the income levels (in yuan terms) of all three categories of domestic consumers in China are not directly affected by the changes in the foreign exchange rate or the domestic industrial policy. Even so, the drop in prices of foreign goods due to the appreciation of the yuan would lead to much larger increases in the consumption of foreign goods in the third category of consumers. Thus total consumption of foreign goods would show marked increase in volume than they would show without Professor Rodrik's proposal. There would be a proportionate increase in the value of the foreign goods consumption in terms of dollars. However, the value in yuan terms would show a milder increase because of its appreciation against the dollar.

In summary, China's total imports in dollar terms would show an accelerated increase, mainly due to (i) changes in consumption behavior among the third category of consumers, in proportions that are significantly larger than the proportion of yuan appreciation, and (ii) increased usage of high quality foreign goods in business investment, construction, entertainment and health, that is proportionate to the yuan appreciation. Recall from above that China's exports would remain largely unaffected by Professor Rodrik's proposal. Consequently, China's trade surplus would shrink at a faster pace than otherwise. Moreover, since the increase in imports is directed towards the larger than normal increase in consumption among the third category consumers, the production of domestic goods is not affected. Hence, China's annual GDP would continue on a 8%+ growth path, as per the current trend.

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Now, for the caveats. The trouble with Professor Rodrik's proposal is that there is no effective way to monitor this exchange between the China and the Western powers. The Western powers would like to have the yuan appreciated against the dollar. So, as Professor Rodrik proposes, say they agree to relax some of the WTO rules. But then, what if political pressure from the party bigwigs in the different regions of China prevents any significant appreciation in the yuan? Resisting the yuan's appreciation against the dollar could turn out to be an issue of national pride for China's middle class that is rapidly becoming highly sensitive about national pride and cultural identity.

Secondly, the Chinese government has announced its intention to promote the yuan as a currency of wide international use within the next decade or so. In that case, it would not be so easy for the Chinese government to control the exchange rate value of the yuan. As long as the only users of the yuan in international currency markets were the exporters from China, all the Chinese government had to do was to collect the dollars from these exporters' revenues from abroad and give them a proportionate amount of yuans in return. This would have held the yuan-dollar exchange rate fixed. But if major economies in Asia and currency traders elsewhere come to use yuan in large quantities, then the movement of the yuan-dollar exchange rate would be far more unpredictable.

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Finally, we provide a better solution for the accommodation of China's rapid economic growth among the other nations of the world. The first point to note is that global imbalances are a matter of direct concern only for policy-makers. The common people are not directly affected by these imbalances. They are far more concerned about their employment and their income levels. Thus the large trade surpluses that China runs up by exporting goods to the developed countries affects the political situation only to the extent that it leads to unemployment and income stagnation for workers in the advanced countries. We address these issues directly in our solution.

The rapidly growing Chinese economy is capable of absorbing a few million workers from America who could then join the third category of consumers in income levels and standards of living. Millions of Americans could be employed in China as teachers of the English language, sports coaches, political and media consultants, skilled factory workers, mid-career managers, hi-tech engineers, fashion designers, company executives and so on. Besides there is a huge craze among Chinese consumers for American goods -- American food, fashion clothing, Hollywood movies, etc. So there is a demand for Americans working as 'cultural ambassadors' in China.

Historically, thousands of Chinese workers had migrated as early as the mid-nineteenth century to build the railroads in America. They had settled down in the China-towns across various cities in America. On the other side, Cancun in China has had settlements of Western traders for nearly two centuries. Elsewhere in China, missionaries from Western countries have preached Christianity for more than a century. During the Boxer Rebellion, local Chinese fanatics had murdered missionaries. It is important to prevent such dangerous mis-understandings during the current phase of globalization. If high unemployment persists for long in the developed countries, there would be a spontaneous global migration among workers in the rich countries to China. The role of the governments is to anticipate and facilitate this migration, and provide for the safety of these millions of people who would have migrated in search of employment and better standard of living.

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A New Perspective on the Global Economic Crisis IV: It is NOT the economy, stupid!

I. Introduction

In the fall of 1992, President Bill Clinton ran for office with the slogan "It is the economy, stupid!" For more than four decades, ever since the end of the Second World War, the central focus of the American Presidency had been to contain the mortal dangers of the Cold War through diplomacy and military readiness. The Reagan-Bush era highlighted the importance of an American President's deft handling of foreign policy negotiations with the Soviets, under the threat of nuclear annihilation. Unfortunately, President George Bush Sr., who had displayed consummate skills of diplomacy in the foreign policy arena right up to the 1991 Gulf War, suddenly found himself ill-equipped when the domestic economy took a turn into a severe recession. It was against this background, that Bill Clinton, then the Governor of Arkansas, demonstrated, by winning the 1992 Presidential election handily, that the American people have realized that the central focus of the American Presidency ought not be foreign policy any longer. Instead, the President ought to be focused on domestic economic concerns, from which all other policies should be derived. Over the next 16 years, professional economists throughout the world have played increasingly powerful roles in determining all aspects of government policy.

With the advent of the current economic crisis, there is once again a pressing need for a paradigm shift. The Federal Reserve and the American government have spent trillions of dollars to rescue the economy from the crisis. The 'official consensus' in the economics profession is that the crisis-management policies that were followed have been a resounding success so far. Even a highly respected economist like Professor George Akerlof has claimed publicly that rescuing the economy from a recurrence of the Great Depression is a huge achievement, implying that this is the best that modern economics could do (he has said in a CNBC interview on October 30, 2009, "we have not done fairly well, we have done extremely well", in answer to the question "so, economics has done fairly well during the crisis?"). In fact, it is on this account that uncle Ben had done a victory lap among professional economists during the Jackson Hole conference in August 2009, and had managed to get himself re-appointed as the next Chairman of the Federal Reserve.

Unfortunately, even after all this trillions of blood-letting, nearly a tenth of the working-age population is expected to be unemployed at any given time during the next two or three years. Due to the massive destruction of wealth in the stock markets and in real estates, it is believed that consumer spending is going to stay depressed for a long time. As a result, the American economy would deliver only a 'new normal' rate of growth, significantly lower than the average rate of growth during the decades prior to the crisis. These 'new normal' views have been expressed by many famous economists, particularly, Professor Michael Spence and Professor Nouriel Roubini. Moreover, the 'official consensus' holds that the US dollar needs to depreciate in value to make American exports competitive, so that America's current account deficits can be reduced. Thus it is expected that the triple phenomena of sustained high unemployment, depreciated dollar and 'new normal' growth rate would correspond to households making adjustments for a steady reduction in the standard of living in America for many years to come.

Reflecting the 'official consensus' in the economics profession, Professor Akerlof goes on to say in his interview, "And, I think we should be prepared that, we don't know where things are going to be headed from now on. I think we should view these [the current recovery] as positive signs, but one should never go through life not being prepared for both what's the positive and the negative, and so, I'm hoping that the Congress and the public and also the Fed and the administration should be prepared for the fact that perhaps things are not going to go as well as they might, and we should be prepared to have further fiscal stimulus and further intervention by the Fed, if things, ah, ..." It is precisely through this sort of enigmatic utterances that economists have brazenly conveyed to the public that over the next ten years the public debt in America would increase by nine trillion dollars. Yet, showing a rare sign of wisdom, the general public has steadfastly refused to accept these predictions of mountainous debt. This has been made crystal clear in the recent fall of nearly 20% in President Obama's approval rating.

The crisis indicates strongly that the central concerns of government policymakers ought to shift away from economics. The tools and techniques that modern economics employs have been shown to be quite inadequate for the task of overcoming the crisis. However, it is unclear exactly how this paradigm shift would take place. One should note that even though the shift away from foreign policy to economics happened in 1992, the remnant of the Cold War military-industrial complex still continues to exert a powerful hold on the Presidency. In fact, by employing scare tactics, foreign policy experts and commentators have forced the Obama administration to fall back on the policies of the previous President George W. Bush in matters of defense and national security. Likewise, the 'official consensus' in the economics profession has the ultimate goal of tying down the Obama Presidency in various economic quagmires so that the government would be forced to do its bidding. So it is not clear as yet how the paradigm shift away from economics would happen, though it is very clear that one needs to happen soon.

In this article, I highlight this pressing need for a paradigm shift by identifying some major weaknesses of modern economics, which demonstrate that the American government could not possibly continue to formulate its policies based on economic considerations alone. The way I do this is by analyzing two recent articles by renowned economists. The first article "Death Cometh for the Greenback" by Professor Joseph Stiglitz appeared in The National Interest on October 27, 2009. The second article is a research paper, "Global Imbalances and the Financial Crisis: Products of Common Causes", by Professor Maurice Obstefeld and Professor Kenneth Rogoff, which was presented in the San Francisco Fed conference in October 2009. This paper is available on Professor Rogoff's website. At the outset, I should say that I have long admired Professor Stiglitz's writings, and that my severe criticism of his recent opinions on the crisis that I mention in this article are meant to be constructive.

In section II, I first provide an introduction to the main weakness of modern economics, namely, that there is a widespread misconception among intellectuals that economics has been modernized by re-working it on mathematical foundations. I explain why economics, modern or otherwise, can never escape being heavily influenced by the machinations of an empire. If the central concern of an economist is efficient allocation of social resources, then she could not avoid looking at her society from the perspective of an empire. Recently, prominent economists, like Professor Robert Lucas, Professor Jeremy Siegel, Professor John Cochrane, and many others have written newspaper/magazine articles to defend the efficient market hypothesis (EMH) in light of the current economic crisis of catastrophic proportions. Unfortunately, the defense put forward by these luminaries is collectively so pathetic and so appaling that it makes me wonder: with proponents like these, who needs detractors?

The fundamental flaw in their approach is to continue to use mathematical formulations to defend EMH. Unbelievably, Professor Cochrane writes, "But this argument takes us away from the main point. The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse". This after more than ten trillion dollars of wealth destruction in the stock markets and the real estates in the last two years! Using the characteristics of an empire that I develop in section II, I provide a more logical framework for discussing EMH. Then the case for free-markets derives directly from the principles of liberty as propounded in the classics of the Western society. Even more fundamentally, the market mechanism is a natural biological phenomenon, as explained in my article, "A New Perspective on the Role of Markets in an Economy". In Section II, I explain why it is not so easy, perhaps well nigh impossible, to replace EMH.

In section III, I elaborate on the weaknesses of Professor Stiglitz's article mentioned above. In particular, I indicate strongly that it is dangerous to replace the dollar as the main global reserve currency with the IMF's Special Drawing Rights (SDR). I do acknowledge that the SDRs could serve an important purpose in safeguarding the reserves of poor countries that are not directly involved in a global financial crisis. This means that the SDRs could play a healthy role in the global reserve system, if they constitute up to, say, ten percent of the volume of international currency use. Two or three years ago, Professor Stiglitz's efforts to replace the greenback with the SDRs as the global reserve currency would have been commendable because the world was then stuck with the reckless policies of American isolationism and military adventurism that were being pursued by the George W. Bush administration. Moreover, assuming that the paradigm shift away from economics does take place soon enough, I discuss methods by which the problems of high unemployment, falling living standards and 'new normal' growth rate can be solved rather quickly. In that event, the US dollar would regain its importance as the main global reserve currency.

In section IV, I analyze the Obstefeld/Rogoff paper. Both the Stiglitz article and the Obstefeld/Rogoff paper share a fundamentally weak perspective, which perspective in fact, enjoys a near-total adherence within the economics profession. This weakness concerns the discrepancy in the methods that economists apply to explain exchange rate fluctuations, and the methods that they apply to explain asset price fluctuations within national boundaries (like stock prices, residential prices, etc). To make this discussion clear, I quote a full paragraph from the Stiglitz article in Section III, before going on to explain why the advent of the current crisis requires addressing this discrepancy urgently. Moreover, addressing this discrepancy is a much simpler approach to exchange rates than the IMF issuing SDRs worth hundreds of billions of dollars. Then I continue this line of reasoning in Section IV to explain why the approach taken in the Obstefeld/Rogoff paper of looking at the East Asian Financial Crisis of 1997-98 as the starting point of the current financial crisis (in view of the sudden increases in global imbalances then) is inadequate and misleading. I develop a much broader framework for analyzing global imbalances. My arguments in Sections III and IV depend crucially on the characteristics of an empire that I develop in Section II.

II. It is not so easy to replace the Efficient Market Hypothesis (EMH)

No civilization worth its name would wager on efficiency as its central concern, most definitely not economic efficiency. It is an empire that is pre-occupied with economic efficiency at every instance. An empire lives and dies by its efficiency. Given this context of an empire, with its pre-occupation with economic efficiency, such an empire-based society could aim to break free from the restrictions that being an empire imposes. The civilizing influence of a liberal tradition is usually the moving force behind this thirst for freedom. History teaches us that to evolve into a civilization, a society need not necessarily start from being an empire. Nor is it necessary that every empire would evolve into a civilization. However, with the security provided by the infrastructure of an empire, an empire-based society has a good chance of becoming a civilization. With the satisfaction of the basic needs of its people that comes with being an empire, the empire-based society learns to aspire, from within, for the achievements of a civilization. Towards this end, the society could provide the utmost liberty to its people, so that they could achieve specialization of skills by pursuing their individual interests. It is with this twin concern of an empire and a liberal society that a theory of efficient markets could be founded.

The efficient market hypothesis could not be defended exclusively on principles of liberty, much less on purely mathematical formulations (see my article, "In response to 'What is the Deficit Endgame?'"). As explained above, consideration of efficiency or any other issue that can be formulated with quantitative precision, is hardly the foremost concern of a society. They are only the means by which a society aspires to the achievements of a civilization. The general version of the efficient market hypothesis says, among other things, that the market mechanism would provide the most efficient allocation of social resources, and that for this reason, the government should avoid any intervention in the functioning of the economy, but should instead let the markets operate freely on the economy. Thus the market strives for efficiency under the civilizing influence of the liberal tradition. No government, no employer, no state, no community, no police, no ruler could deny the liberties of the individual. She is free to participate in the market activities in her own interest and of her own choice. One consequence of the current economic crisis is that the version of the efficient market hypothesis that was advocated by the Chicago School, based purely on mathematical formulations, has been heavily discredited.

With the massive destruction of wealth that the current crisis has wrought, it is clear that the functioning of the markets in recent times has been far from efficient. It was John Maynard Keynes who first provided a mathematically-complete theory that explained why the markets could be stuck in a sub-optimal (i.e., inefficient) mode of operation for a prolonged period of time, may be even for several years. The validity of Keynesian theory was borne out by the experiences of the Great Depression. For example, if nearly a quarter of the population can be unemployed for several years, as happened during the Great Depression, that is clearly a huge inefficiency. To kick the market mechanism out of its sub-optimal rut, Keynes advocated direct government intervention in the economy through massive spending, in addition to the pro-active relaxation of the monetary policy by the central bank. Moreover, if the markets were left to their own devices during this sub-optimal rut, then from time to time there could be widespread panic in the markets, at which times there would be massive and persistent destruction of wealth.

Precisely in view of this reason, the government's spending should be administered without any considerations of efficiency whatsoever, according to Keynesian theory. The government could simply employ thousands of people to build a dam, and if it gets washed away, that is bloody well fine. All that matters is that the wheels of the economy are kept turning at their usual speed. What does a couple of trillions matter when spent in such a noble cause? Now, the problem is that, as mentioned above, an empire lives and dies by its efficiency. If the government at the center of the empire would need to overlook considerations of economic efficiency for several years at a time, even if only on rare occasions, occasions occurring once every century or so, even then, who would bear the consequences of this inefficiency? This is the gaping hole in Keynesian theory. By adopting a mathematical foundation, Keynesian theory pretends that considerations of efficiency do not matter. But, in fact, the empire is nothing if it does not transfer wealth destruction from its center to the periphery very efficiently, no matter whether it functions under Keynesian theory or otherwise. The consequences of Keynesian theory cannot be separated from colonial exploitation.

History provides many relevant examples. In awarding Professor Amartya Sen the 1998 Nobel Memorial prize in Economics, the Nobel Committee cited his work on the Bengal famine of the 1940s. Millions of people died of starvation during this famine, even though there was enough food production in India during that time. Sen's work demonstrated that the problem was not one of production but of distribution. It is not very hard to investigate, with modern facilities for computation and data gathering, as to what extent, the famine in Bengal resulted from the 'economic adjustments' that the advanced countries made to overcome the depression of the 30s and the onset of the Second World War. Another example is the famine in Ireland during the mid-1800s that was caused by the imperial machinations of the British empire. Sixty four years after the Second World War, the developing countries have thought long and hard, and have built their own defenses against colonial exploitation. This time some of them have hundreds of billions of dollars in foreign currency reserves and are exploring possibilities for reverse-colonization, or at least that is the fear that seems to be driving economists in Western countries. It would be far wiser to stick with the efficient market hypothesis, under the newly refined view that the EMH has to be super-imposed on the infrastructure of an empire.

III. It is dangerous to replace the US dollar as the global reserve currency with the IMF's SDR

The Stiglitz article and the Rogoff/Obstefeld paper both share a common weakness of perspective, which is in fact, widespread among the economics profession. To explain this weakness, I quote a full paragraph from Professor Stiglitz's article mentioned above:

"The strength of the dollar is determined by the laws of supply and demand, just like the value of any asset. The demand for a currency is based on the return to holding the asset relative to other assets, e.g., the interest rate received from a dollar asset, like a Treasury bill, plus the expected capital gain or loss. Demand today (and thus the value today) depends critically on expectations about the value tomorrow, but the value tomorrow will, in turn, depend on expectations of the day after. Prices are inexorably linked to expectations of the future, both near and far. If investors, or even people as a whole, believe that sometime in the future there is going to be high inflation, then those who hold dollars will be able to buy less with those dollars. The demand for dollars then--and now--will decrease, and hence (holding everything else constant) so will the value of the dollar at the present moment."

Thus in Professor Stiglitz's opinion, the value of the dollar is determined by laws of supply and demand. Demand, in turn, is determined by the return to holding a claim on the dollar, relative to holding claims on other assets. And the return on holding a claim on the dollar is estimated by expectations about the future. In normal times, this is how any other asset is also valued. However, in determining whether the market is overvaluing a company stock, or if a housing bubble is in the making, there are indicators based on 'intrinsic value' of the underlying asset that the experts rely on. For example, market participants simply do not value a company share based on expectations of earnings and price appreciation all the time. In times of uncertainty, the underlying assets of the company, namely plant, machinery, buildings, cash reserves, book value, managerial expertise, market share, technical know-how, etc, are examined. Likewise, in mortgage securitization markets, during boom times, trading is done on just the return on the mortgage security. However, when a bubble is forming, the bubble is investigated based on the valuation of the underlying asset also -- cost of construction of houses, house price to rent ratio, rise in house prices, etc. In stark contrast, for exchange rate valuations, the economics profession simply does not want to rely on any 'intrinsic value' of the claim on the currency.

One plausible indicator of 'intrinsic value' in currency valuations is the per capita GDP of the country that issues the currency. The Western liberal tradition holds all human lives to be equally valuable and equally worthy of opportunities provided under the law. So, there is a powerful motivation for holding per capita GDP as the measure of a currency's worth. Other plausible indicators for the intrinsic value are per capita GDP in purchasing power terms, human welfare index, law and order, financial wealth per capita, etc. Yet, the economics profession makes such a hue and cry that China's currency is under-valued, as if the future of civilization depends on it. China has, in fact, followed the ratio of per capita GDP (in dollar terms) between America and China as the guideline for 'regulating' the dollar-yuan exchange rate. The economics profession brings a great sense of purpose in avoiding any discussion about 'intrinsic value' in exchange rate valuations. It is not by coincidence that exchange rate markets are much more volatile than domestic markets. This extra volatility is an important mechanism by which an empire transmits great destruction of wealth from its center to the rest of the world. In contrast to liberal principles, an empire does not believe that all human lives are equal. The people of the empire are of far greater importance than the rest. Historically, empires have shown strong predilection to annihilate, enslave or colonize the rest of the world.

Thus Professor Stiglitz's efforts to replace the dollar with the IMF's SDR aims to redress some of the injustices mentioned above. However, introducing trillions of dollars worth of the IMF's SDRs is quite dangerous. First of all, different parts of the world are growing at vastly different rates; the value of trade activity fluctuates heavily with the prices of commodities; political environments keep changing all the time. How is the IMF going to decide how to vary its allocation of SDRs to the member countries according to the rapid economic changes happening around the world? Secondly, the IMF as an institution is run by bureaucrats. What is to prevent the influence of vested interests in the administration of these SDRs, worth billions of dollars? Thirdly, what if member countries get into disputes over the value of SDRs? Countries going to war over balance of payment issues are not unknown in history. Fourthly, does the IMF have the resources to prevent counterfeiting of the SDRs? Moreover, assuming that the paradigm shift away from economics does take place soon enough, then it seems quite possible that the US economy could achieve a robust recovery. That would solve the problems of high unemployment, depreciated dollar and 'new normal' growth rather quickly. In that case, the US dollar would regain its importance as the main global reserve currency.

We suggest a method for tackling unemployment effectively: with a new President in office, many regions of the rest of the world have become far safer for Americans to live and work in. Consequently, the American government could negotiate treaties that would ensure the safety of Americans working abroad. Millions of Americans could be employed abroad, for example, as teachers of the English language, sports coaches, political and media consultants, skilled factory workers, mid-career managers, hi-tech engineers, fashion designers, company executives, and so on. By enlisting the forces of globalization in its favor, America can bring powerful downward pressures on the unemployment rate which has been forecast to remain high at 10% for at least the next two or three years. Especially the manufacturing industry which has been taking massive job losses can send its skilled workers to factories abroad. In these ways, tens of millions of Americans can find employment. This is a far cheaper approach than spending trillions of dollars to resuscitate entire industries within America. Once the unemployment problem is solved, there is no doubt that hi-tech, green energy and health care industries could drive robust growth.

IV. Main Cause of the Financial Crisis

Of the total world population of 6.7 billion, less than 1.3 billion resides in the advanced countries (US, Canada, Europe, Oceania). With the end of the Cold War, the process of globalization brought billions of people from Asia, Latin America and Africa into the workforce of an increasingly connected global economy. This sudden inflow of labor put strong downward pressures on the cost of labor in the advanced countries. On the other hand, ever since the end of the Second World War or even much earlier, the financial capital of the world has been largely concentrated in the advanced countries. The developing countries hardly have any accumulation of capital. They do not have any social security system. Their pension systems are very rudimentary, being nothing more than remnants of the colonial era. Only through trade surpluses could they ever have managed to build any reserves. So, the advanced countries have a strong comparative advantage in the global supply of financial capital.

Thus the growth driver for the advanced countries would be the interest that they can charge from the developing countries for lending out their finance capital. In addition, the advanced countries could employ their lead in technological know-how as a source of economic growth by acting as knowledge-providers for globalization. Since most of the financial capital of the world is accumulated in the advanced countries, the central banks of these countries have powerful influences on the global interest rates on financial capital. By following a policy that aims to keep global interest rates high, the Fed could enable American financial companies to make a lot of money in interest charges. Instead, uncle Ben follows the bizarre policy of keeping domestic interest rate indefinitely at zero in ever-hopeful prayer of realizing growth in the domestic economy, while unemployment stays high. Moreover, rather than enable the already existing accumulated capital of America to generate growth opportunities, uncle Ben is flooding the economy with newly printed money.

The total value of the financial wealth of America has ranged between 45 and 65 trillion dollars during the 2000s. Out of this, total securitization (residential and commercial mortgages, credit card, auto-loans, student-loans, business loans, etc) has ranged between 10 to 30 trillion dollars. The gross US issuance of agency MBS alone during the period 2001-05 totaled more than 6.5 trillion dollars (http://en.wikipedia.org/wiki/Mortgage-backed_security). Thus the accumulated capital of America had been engaged in rapidly turning America's fixed assets into highly liquid financial assets through the process of securitization. In contrast, US current account deficit has only ranged from 400 to 800 billion dollars per annum during 2004-07, even less during earlier periods. Thus the main cause of the financial crisis is the excessive speed of the process of securitization. Because America's own accumulated capital had been invested in the highly lucrative process of securitization, there was a vacuum -- a need for capital to finance America's fiscal deficits. This need was filled by the Asian countries' purchase of treasuries (primarily China) to shore up their own foreign currency reserves.

Why do some developing countries like China hold massive foreign currency reserves ($2 trillion currently)? As mentioned above, the advanced countries hold the predominant share of the world's financial capital. In the 1990s, they had invested vast sums of this money in the fast growing economies in East Asia, both in fixed income as well as risky securities. Due to the rapid growth of the East Asian countries, the investments accumulated profits very fast. However, these Asian economies were not mature enough to absorb all the trillions of dollars of capital waiting to be invested. So, they showed signs of overheating. Meanwhile, starting from the mid-90s, the tech boom had taken hold in earnest in the US. So, all the capital invested in the Asian countries had to leave at once. When the accumulation of profits was also taken into account, much more dollars had to go back from the Asian countries than the amounts that came in. Consequently the East Asian countries experienced currency crises and defaults on their debt. It is to avoid the recurrence of this problem of sudden flight of foreign investments that the developing countries are accumulating large foreign currency reserves.

The current generation of leading economic policymakers, which includes Professors Paul Krugman, Barry Eichengreen, Kenneth Rogoff, Maurice Obstefeld, Ben Bernanke, Bradford DeLong, Martin Feldstein and Larry Summers, have grown up learning exclusively the type of economics that is useful in the administration of an empire. They believe that the permanent treasures of the empire are safely locked up in its center. Their job, according to them, is to simply conduct economic interactions with the rest of the world using the 'marginal resources' of the empire. It is for this reason that they advocate strongly that America's current account deficit should be redressed through the depreciation of the dollar. They would not want to take the total accumulated capital of America into consideration. They have also come to believe, especially through the works of Professor Eichengreen, that maintaining a strong dollar had been a major cause of the Great Depression. Hence they would like to get the current value of the dollar depreciated at the first opportunity.

Unfortunately, they don't realize that during the Great Depression there was hardly any accumulated capital in the whole world. Whereas today the 45 to 65 trillion dollars of financial wealth inside America would lose value if the dollar is depreciated. This would be reflected directly in the standard of living of Americans in the coming years. Moreover, with the massive destruction of wealth in the stock markets and the real estates, it is no longer possible to conduct the affairs of the empire 'at the margin'. It is also not possible to transmit trillions of dollars of losses to the rest of the world through temporary exchange rate volatility. These high risk games are not without consequences. The rest of the world has seen this movie before. They know how to make sure that the much larger accumulated capital inside America would take a big hit too.

China's Dollar Opportunity

(In response to Professor Kenneth Rogoff's article on Project Syndicate, "China's Dollar Problem")

Pegging the Chinese Renminbi-Yuan to a fixed exchange-rate with respect to the United States Dollar provides by far the most promising strategy for China to achieve the status of an economically advanced nation over the course of the next 30 years. Going by the writings of economists in the Western countries, for example, Professor Martin Feldstein and Professor Kenneth Rogoff, it would appear that China's burgeoning dollar reserves, currently at $2 trillion, are a threat to the Chinese economy in the medium term (4 to 12 years). However, the smart policy-makers in China have realized that, in the medium term, their best option is, in fact, to closely peg their currency to the US dollar. This currency peg implies that the Chinese have essentially adopted the monetary policy of the United States as the de facto monetary policy for their own economy. In addition, China's huge trade surpluses with the United States, have resumed accumulating at nearly the same pace as before the economic crisis (http://www.census.gov/foreign-trade/balance/c5700.html#2009). This means that the American economy serves as the market for the prodigious amount of goods produced by the rapidly growing Chinese economy. In short, the twin policy guidelines, viz., currency peg to the dollar and the export-driven growth model, provide the most stable, steady and the shortest road-map for China to achieve its place among the wealthiest nations of the world, in the next two or three decades.

As a result of adopting the same monetary policy as the United States, the Chinese are the biggest beneficiaries of uncle Ben's largesse. Recall that the the Federal Reserve Bank of the United States has been pursuing an extremely lax monetary policy for the last 15 months or so. Since their aim is to maintain a fixed dollar-yuan exchange-rate, the Chinese policy-makers had instituted their own massive spending program commensurate in laxity with those of the Fed. Since the Chinese economy is experiencing more than 8% real growth in annual GDP, it is able to put to good use, the trillions of yuans of currency-printing that China had to do to keep up with the Fed's dollar-printing. Moreover, since the Chinese economy is growing so fast, China's GDP would more than double in the next ten years. Thus China could comfortably let its dollar reserves grow from the current $2 trillion, to $4 trillion in the next 10 years. In the final analysis what the Chinese policy-makers have done over the course of the last two decades, is simply to stich the Chinese economy and the American economy together, so that the two economies function, for a large part, as a single economic entity.

The concept of 'Chimerica' was already much in vogue by the late 90s, among businessmen, multinational corporations, and small businesses involved in imports-exports. During the financial crisis of 2008, notable historians like Professor Niall Ferguson declared the end of Chimerica, based on considerations of disparity in savings, consumer spending and military might. In fact, many famous economists have been writing about the dangers of global imbalances for several years now. However, these views suffer from a serious flaw. The flaw is that the economists who complain about global imbalances believe that the Chinese policy-makers would like to stop accumulating dollar reserves, in the short or medium term, and instead switch to a more broad-based basket of currencies. In the medium term, nothing is more beneficial to the Chinese economy than to continue accumulating dollar reserves and watch the actions of the Fed closely. It is only in the long term, when China's per-capita GDP, approaches the levels of the advanced industrial countries would the Chinese policy-makers need to worry about the depreciation in value of their dollar reserves.

Perhaps economists have been misled by the fact that the Chinese policy-makers have been severely critical of America's lax short-term economic policies. Basically, the reason for China's attitude is that the Chinese would like America to conduct its economic policies according to what is best for Chimerica. In the long-term, this is a really wise course of actions for both China and America. However, if the American policy-makers would not agree to it, then China still has a lot of time to move away from the dollar as its main currency of reserves before the long-term arrives. In the meantime, America is already experiencing serious losses because of following an economic policy that is not in the long-term interest of Chimerica, but that is only in the short-term interest of America alone. To wit, the money-printing that the Fed has done has gone largely to finance the rapid economic growth in the rest of the world, including China. Whereas, the American economy is still mired in anemic growth after more than 20 months into a recession. And if the "new normal" folks are to be believed, America is going to suffer anemic growth for many years to come.

Professor Rogoff cites the example of Europe in the 50s and 60s, to dissuade the Chinese from continuing to accumulate their dollar reserves. However, the example of Europe is not really appropriate for the situation that China finds itself in currently. The countries of Europe had about the same per-capita income as the United States in the 50s and the 60s. Between two wealthy nations, subtle variations in their economic fortunes could lead, over the course of a decade or two, to significant differences in their realizing their respective economic potentials. Whereas, considering the vast differences of wealth between China and America, one sees that it does not matter what crises befall America. By simply tying itself strongly to America in economic matters, China is guaranteeing for itself a road-map towards creating for itself the wealth of the rich nations. Once one envisions an economic entity (viz., Chimerica) that consists of the material resources of America and China put together, along with the 300 million people of America and the 1.3 billion people of China, one sees that modern economic theory suffers from serious deficiencies that cannot be dealt with by the currently fashionable Keynesian theory.

For example, Professor Krugman has recently grown fond of using the Taylor rule to demonstrate that the Fed should not raise interest rates for many months to come (http://krugman.blogs.nytimes.com/2009/10/10/the-madness-of-the-monetary-hawks-wonkish/). However, if one considers Chimerica, then the current zero percent growth rate of the $14 trillion American economy and the 8 percent growth rate of the $3.5 trillion Chinese economy average out to a 1.6 percent growth rate for the $17.5 trillion economy of Chimerica. Again, the current 9.8% unemployment rate among 300 million Americans gets significantly mitigated when one takes into account that there is less unemployment among the 1.3 billion Chinese, in view of the rapidly growing Chinese economy. So, the nominal interest rate specified by Taylor rule for Chimerica is much more than that for America. Modern economic theory is painfully ill-equipped to handle the challenges of the current economic crisis. Unfortunately, as I mentioned in my previous article, the "official consensus" shows no sign of budging from its perennial oscillation between monetarism and Keynesianism.

The official consensus

Professor Martin Feldstein's latest article, "The G-20's Empty Promises" on Project Syndicate needs careful consideration. In his article, Professor Feldstein essentially adopts the "official consensus" of the economics profession on the current economic crisis. This official consensus, in its various manifestations, has also been elaborated on by other famous economists, notably Professor Robert Lucas in his article "In Defense of the Dismal Science" in the Economist in early August, and by Professor Paul Krugman in his recent article "How Did Economists Get It So Wrong?" in the New York Times Magazine. One characterizing feature of this official consensus is a confidence (a.k.a. triumphalism) in the certainty of outcomes predicted by modern economic theory. The main precepts of this official consensus are

(i) Professor Ben Bernanke, the Chairman of the Board of Governors of the Federal Reserve, has at his disposal all the theoretical tools of economics that are necessary and sufficient to deal with the current economic crisis. As Professor Lucas explains it in his Economist article, if one were able to predict in advance exactly when a market crash would occur, it would imply that the market entertains arbitrage opportunities. Hence, it is not possible to predict financial crises in advance. However, except for the precise timing of the occurrence of financial crises, macroeconomic theory could explain the workings of the economy completely. In particular, to avert the recurrence of the Great Depression, certain actions were needed to be taken by the Fed -- the specifics of these actions were all clearly understood by the economics profession. However, it was politically untenable to take these actions before there was a financial crisis. Once the financial crisis occurred though, Professor Bernanke could intervene in the markets and take the necessary actions (in the Fall of 2008). These actions include the injection of several trillion dollars into the economy and making the availability of credit the cheapest possible. The actions taken by the Fed have now resulted in the economy avoiding a recurrence of the Great Depression. This is, in brief, what Professor Lucas has stated in his Economist article.

(ii) Thus in Professor Lucas' interpretation of things, the collapse of Lehman Brothers, for example, was necessary, in order to justify the intervention of the Federal Reserve in the functioning of the markets. The collapse of Lehman Brothers was, although regrettable, an unavoidable event. But, on the whole, monetary policy, even if it is a profligate one, would be necessary and sufficient to prevent the recurrence of the Great Depression, in Professor Lucas' view. Furthermore, the old wisdom of the Chicago School that government should be kept minimal at all times continues to hold, even in light of the current economic crisis. The Keynesians led by Professor Krugman, on the other hand, believe that Lehman Brothers should never have been allowed to fail. In their view, when the Fed's fund rate is at zero, monetary policy is largely ineffective for sustaining and stimulating economic activity. This is because of liquidity traps caused by businessmen who don't see economic opportunities that would induce them to borrow the cheap money available from the banks. Hence the government should step in to provide massive fiscal assistance to the economy by taking on spending directly, even if it means assuming trillions of dollars of public debt.

(iii) Professor Krugman scored a lot of points by pointing out that the current state of economic theory, highly influenced as it is by the efficient market hypothesis of the Chicago School, indicated that a crisis of such magnitude as the current economic crisis could not happen at all. This fundamental failure to recognize that an enormous crisis could indeed happen, calls for the overthrow of the policy that markets provide the best social gain when they are completely free from government interference. From first impressions, it might seem that the views of the monetarists and Keynesians are vastly different. However, it is important to note that in the view of the Keynesians too, once large scale government spending as prescribed by the Keynesians is instituted, there is again enough assurance that modern economic theory (although with a heavy Keynesian tilt) would be sufficient to deal with the current economic crisis.

(iv) In this regard, perhaps it is relevant to refer here to Professor Robert Shiller's latest article, "Re-inventing Economics" on Project Syndicate. Professor Shiller points out that the free market ideology fails to identify bubbles. Because of the belief that markets know best on all occasions, bubbles cannot occur according to the free market ideology. Professor Shiller's approach pursues a different branch of the Keynesian school of thought than the big spenders. Rather than advocate large government spending to avert a depression, Professor Shiller proposes using techniques from behavioral psychology to predict bubbles in advance. In this way, the socially harmful effects of massive mis-allocations of capital that arose in the case of the housing bubble or the tech bubble could be prevented in the future. In his other recent article, "Echo Chamber of Boom and Bust" in the New York Times, Professor Shiller elaborates further on the techniques that one could use for studying bubbles. Briefly, the process by which confidence or panic spreads in markets is very similar to the process by which diseases spread among populations. This outlook allows for introducing methods that scientists use to study epidemics into the study of bubbles.

(v) The Keynesians have also managed to re-write the conventional wisdom on the advantages of a strong dollar. Through the works of Professors Barry Eichengreen, Jeffrey Sachs and Ben Bernanke, a consensus has developed that attempting to support the gold standard was a major cause for the prolongation of the Great Depression. This has resulted in a viewpoint among economists that a devaluation of the dollar, at present, would help to reduce global imbalances by restoring the American manufacturing industry. The implications of this viewpoint were analyzed by Professor Feldstein in his July 2009 article "America's Saving Rate and the Dollar's Future" on Project Syndicate, with the conclusion that devaluation of the dollar would necessarily lead to a better future for America. Lost in this new interpretation is the fact that a stable dollar provides many economic benefits for America. The equity premium for American companies taking more risks globally, the transaction charges for providing market making facilities in global markets, and the provisions of liquidity for the currency of international trade are major drivers of economic growth for America, which derive from the dollar being the global reserve currency.

(vi) Some other Keynesians have gone beyond questioning just the free market ideology. For example, in his latest article, "GDP Fetishism" on Project Syndicate, Professor Joseph Stiglitz proposes a broad set of economic indicators like health, well-being and sustainability rather than a narrow focus on GDP growth. Yet other developments imply that the rest of the world is steadily moving away from using the dollar as the main reserve currency. To finance this new global reserve system, the IMF has created $250 billion worth of Special Drawing Rights (SDR), and the IMF has indicated its intention to triple this allocation of $250 billion in the future. It would need a strong commitment from the policy-makers in America to re-claim for the dollar its position as the predominant global reserve currency. However, judging from the writings of American economists like Professor Feldstein, it appears that the consensus among professional economists favors devaluing the dollar instead.

(vii) The official consensus is a result of a grand compromise between the Chicago School economists and the Keynesians.The conservative economists of the Chicago School would like to avoid the embarrassment of getting publicly criticized for the failures of the efficient market hypothesis that this current economics crisis has severely exposed. So famous conservative economists like Professor Lucas have reached out for a consensus by indicating their willingness for a compromise. This compromise involves among other things, (a) foregoing raising concerns about the government's mismanagement of Fannie Mae and Freddie Mac, and (b) lending support to the Fed and the Treasury in their efforts to stabilize the economy, even if the methods that the Fed and the Treasury employ are highly inefficient. What are the Keynesians compromising on? Well, the Western liberal tradition has been intellectually bankrupt ever since the late 1960s. It is only the free market ideology of the Chicago School that has served as the driver of wealth creation in the advanced countries during the last four decades. Hence, the official consensus is a convenient compromise for the Keynesians to avoid asking difficult questions about the future of the Western liberal tradition. Instead, they would like to enact much drama in the media about the resurrection of their hero, John Maynard Keynes.

(viii) One other characterizing feature of the official consensus in the economics profession is a collective tendency to "Blame It All On Obama". The conservative economists blame President Obama for not focusing adequately on America's ballooning national debt. The liberals, led by Professor Krugman, fault President Obama for getting distracted from the left's free spending ways by concerns on the size of the fiscal deficit. In the confusion that has ensued, President Obama's own team of economic advisers has fallen back on the official consensus in the economics profession. Availing themselves of the security provided by this official consensus, President Obama's economics team has misled the President thoroughly in economic matters. To begin with, the President is only empowered to administer the nation's affairs for a four year term. The projections put out by the Congressional Budget Office (CBO) for the deficits in the next decade are only a non-authoritative guidance for where the nation's finances would be, if current policies hold for the next decade. Instead, the democrats have been behaving as if the $9 trillion of additional public debt that the CBO projects for the next decade is already a given certainty. In particular, they have not been careful to mention clearly in public discussions how much of this extra spending can be attributed to the President's own spending plans in his current four-year term. Neither have they shown any concerns for taking the Fed and the Treasury to task for their highly inefficient methods to stabilize the economy. Because of these instances of neglect, the public is not willing to trust the government in financial matters. President Obama has rapidly lost his approval ratings. Professor Lawrence Summers, Professor Christina Romer, Professor Austan Goolsbee and Professor Peter Orszag are directly responsible for this abuse of public trust.

(ix) The official consensus has also prevented economists from recognizing that President Obama's universal message of tolerance and justice, which has been received very favorably all around the world, actually opens up vast areas of economic opportunity for America. Unfortunately, it does not matter, for the economists, whether George W. Bush or Barack Obama is in office. The most they can do is re-work their models to favor Keynesian policies, and to argue that the policies they propose arise directly from their number-crunching methods. One might be tempted to attribute this widespread consensus among economists to stick to a narrow theoretical interpretation of the current economic crisis, to the certainty afforded by the mathematical models, which have become indispensable through the course of the 20th century, for the development of economic theory. However, this would be a big mistake. The official consensus in the economics profession is primarily a result of undue influences of power and money. It is much less a result of mathematically based economic theory. In the long-term, this attitude among economists of sticking to an official consensus is going to do serious damage to the American economy. Some other aspects of the official consensus have been explained very well by Professor Kenneth Rogoff in his recent article, "The Confidence Game" on Project Syndicate. I recommend that the reader go through that article. The official consensus is the single largest threat to a robust recovery in the global economy. The official consensus also gravely misinterprets the events of the Great Depression. The implications of this misinterpretation bear directly on the economic health of America.

A New Perspective on the Global Economic Crisis III: The Way Forward

I. Introduction

The American economy has reached the cross-roads. Unfortunately, the majority opinion in the community of economists is headed in a different direction from the policies that I think would be prudent in the long-term. This majority opinion holds that the Federal Reserve's intervention in the financial system during the last one year has managed to prevent a return of the Great Depression, but that the economic recovery that lies ahead would be slow and uncertain. There is definitely a sense of being at the cross-roads. The drastic fall in industrial activity during the last three quarters seems to have been contained. The regular recurrence of financial panics that took the Dow Jones Industrial Average from 14000 down to 6500 between October 2007 and March 2009 seems to have been halted. For the second quarter of 2009, companies have reported earnings that have far exceeded expectations, especially the financial companies have done so.

On the other hand, the pressing question among economists at this time is whether the current recovery would be robust and sustained. To be fair, the dangers that the American economy would fall back in to a few more quarters of negative growth, as happened in the 1980-82 recession, are indeed real. The global economy seems to be in a slightly better shape, but since it is heavily dependent on the American consumer, its recovery at this point is suspect as well. However, this does not mean that America's long-term economic policy should continue to be dictated by the Federal Reserve, or by the Treasury, or even by the cabal of economists that currently exerts great influence on the American Presidency. In this article, I provide an alternate view for the long-term economic policy that governments around the world ought to follow.

II. Toning down American triumphalism in exchange for long-term economic growth

The fundamental theme in this article is that by 'toning down' the Cold War remnant of American triumphalism to the appropriate level, America could sail through the current economic crisis much more smoothly than economists expect now. This 'toning down' would involve better sensitivity to the concerns of the rest of the world. In particular, facilitating the high growth rates of the emerging market economies, instead of attempting to block them through shrill cries about global imbalances, should be one major goal. One other major goal is for America to bring serious commitment to eradicating global poverty. In return, America could avail of significant economic opportunities as the banker, the lawyer, the scientist and the doctor of the world. In my current estimates, which are admittedly crude, these economic opportunities could ensure between 3/4 and 1 1/2 percent of real growth in annual GDP for many years to come. With a conservative estimate for an additional long-term real growth rate of 1 1/4 to 2 percent that the economy could generate domestically, we see that America could achieve significantly higher growth rates than the "new normal" that is being touted in the media these days.

These methods that I propose in this article, for estimating the increased long-term economic opportunities that would arise by toning down American truimphalism, apply mainly for firms that provide services of the following nature: financial, legal, accounting, information technology, digital networks, computing devices, print and online media, sports, health-care, alternative energy and consulting. Hence, the methods introduced here would be supplementary to the durability approach that I had introduced in my recent article, "A New Perspective on the Global Economic Crisis II: Fear of Reverse-colonization Did It". Please recall that my durability approach enables estimation of growth in those industries whose operations can be explained by traditional economic theory, for example, manufacturing, agriculture, food processing, clothing, retail & distribution, construction and transportation.

We note here that, at this early stage, we do not provide estimates for economic growth that would arise from the increases in international trade that would result when American triumphalism is toned down. We only quantify these increases in international trade to the extent that they would confirm the estimate of 1 1/4 to 2 percent of real growth rate for the domestic economy that was cited above. In fact, in this article, our focus is mainly on discussing how the toning down of American triumphalism would bring benefits to America from the fact that the US dollar is the predominant global reserve currency. The equity premium for American companies taking more risks globally, the transaction charges for providing market making facilities in global markets, and the provisions of liquidity for the currency of international trade are already major drivers of economic growth for America. In addition, corporate law and company-based organization are two Western institutions that could provide indispensable services in a rapidly globalizing world.

With America managing robust long-term growth, the prospects for the emerging market economies to regain their rapid-growth path would be re-ascertained, in addition to the prospects that they would achieve rapid-growth on their own even if the world were to be de-coupled. As a result, robust growth, instead of "new normal" growth, for the global economy seems achievable as well. The main difference in my approach is that I have tried to quantify the enormous economic opportunities that have newly opened up due to the world-wide popularity of the Obama Presidency. Whereas the "new normal" folks are stuck with the Bush era mentality of American isolationism and military adventurism.

Even worse than the "new normal" folks are the Great Depression maniacs, who are stuck in a colonial era mentality. It was a standard trick of the colonial empire, in the time of Keynes and earlier, that before an economic downturn arrived, the policy makers at the center of the empire would constantly proclaim an exaggerated sense of calamity and crisis in the media. In this way, they would facilitate the printing of loads and loads of the colonial reserve currency. The colonial empire thus retained the great advantage of exercising 'first use' on the newly printed money, much before inflation or devaluation could catch up with the flood of liquidity. Moreover, when the money finally reached the colonies, it siphoned off economic growth from the colonies, and channeled it to the center of the empire. The gullible political leaders of the colonies, who had invariably received their education at the empire's leading universities, were not smart enough to figure out what was going on. Even as late as 1997, the East Asians did not figure it out.

It is unfortunate for Western intelligentsia, that at this current time, the Chinese have understood this game all too well. When the Federal Reserve printed several trillions of new money last year, the Chinese had quickly released their own currency into their own economy, in anticipation that over the next few years, a significant part of these several trillions dollars that the Fed has printed would flow into China. As a result, the weak dollar policy followed by Professor Ben Bernanke, the Chairman of the Federal Reserve, under the guise of the savings glut theory, has been a colossal failure. It is highly unlikely that the Federal Reserve led by a re-appointed Professor Bernanke would follow a policy of a stable dollar. For this reason, it is highly unlikely that the process of 'toning down' American triumphalism in exchange for long-term growth opportunities that are robust and stable, would be facilitated by the re-appointment of Professor Bernanke.

As feared in many quarters, it would be a grave mistake to appoint Professor Lawrence Summers as the next Chairman of the Federal Reserve. I would definitely agree that he has done a commendable job of stewarding the $787-billion American Recovery and Re-investment Act of 2009, right from its origins. However, in my opinion, his understanding of economic matters is not deep enough that he would be able to shrug off the strong sense of American triumphalism that he emanates in all his appearances at international fora, for example, at the annual Davos meetings. I hope that the fact that in contrast, Professor Joseph Stiglitz is hugely popular in foreign countries would help American economists understand that in the international arena, it would be very difficult in the future to pass off American triumphalism as a substitute for serious scholarship.

I would also recommend strongly that Professor Summers should not continue as the Director of the National Economic Council, since this position implies a near-daily access to President Barack Obama in an advisory and tutorial role on economic matters. In fact, I would support replacing the current Treasury Secretary Timothy Geithner with Professor Summers, in view of the Treasury Department's appalling performance in devising a program like the Public Private Investment Program (PPIP). I would also recommend replacing the budget director, Professor Peter Orszag and senior economic adviser Professor Austan Goolsbee. They have taken too long to retire the $260-billion of unused money from the TARP funds, so that the estimate for the budget deficit could be revised downward. Please recall that I had strongly advocated against enacting this $700-billion TARP in the first place. This would all have been far simpler, if instead, my price adjustment mechanism was adopted last September.

The third candidate, that is discussed in the media, for the position of the Chairman of the Federal Reserve Board is Professor Janet Yellen. I should say that I have not studied enough of her published work in economics to be able to make up my mind about the suitability of Professor Yellen for this position. However, I do have two strong candidates whose appointment as the next Federal Reserve Chairman, I would support strongly. My first choice is Professor Robert Mundell, whose appointment would come with his deep understanding of international currency systems. If he is not available, then I would support the appointment of Professor Edward Prescott. Professor Prescott has done ground-breaking research on the theory of business cycles, and he has been a senior adviser to the Federal Reserve Bank of Minneapolis since 2003. I would also comment here that the appointment of either Professor Mundell or Professor Prescott would demonstrate that the Obama administration is committed to supporting the public service of economists purely on the basis of their professional merit, and not on any considerations of political ideology.

III. Kudos to Professor Richard Cooper for anticipating some of my ideas, but our views are essentially different

In the last week, it has come to my attention that Professor Richard Cooper of Harvard University had already been writing about some of the same ideas that I have proposed recently. In particular, the radical idea I had proposed in my June 2009 article, "A New Perspective on the Global Economic Crisis", that global imbalances should continue was already proposed by Professor Cooper in his article "Living with Global Imbalances: A Contrarian View". His article was published way back in November 2005, and is available on his website. Moreover, Professor Cooper has also written an interesting article, "The Asian Crisis: Causes and Consequences" in 1999. I would definitely commend Professor Cooper for his early insights into the nature of global imbalances. Having said that, I would like to explain how his views are essentially different from mine.

Firstly, Professor Cooper believes that the Anglo-Saxon model of capitalism is what enables America to take relatively more risk in global economic ventures, in contrast, for example to the Asians, who tend to be risk-averse and save more. Secondly, Professor Cooper writes that the rest of the world sends huge amounts of its savings to America because of the unparalleled depth and liquidity provided by the American financial system. In fact, in his November 2005 article cited above, Professor Cooper says that the sophistication of the financial products available from America could enable continued imbalances in the US current account deficit. By sophistication is meant, of course, the theoretical advancements in risk management and portfolio theory that have been obtained, using mathematical foundations, during the second half of the 20th century, and the rapid implementation of these theories on computer-based trading systems which are heavily inter-connected through high-speed networks. Mathematical sophistication is the only type of sophistication that America operates on, at present, in its economic interactions with the rest of the world because of the 20th century's mathematization of every aspect of economic theory.

In contrast to Professor Cooper's perspective, in my view, the Anglo-Saxon model of capitalism is no longer adequate for studying drivers of global economic growth, especially after the financial crisis of 2008. Instead, I have elaborated on a new framework provided by a confluence of the Roman law and jurisprudence, and other ancient systems of law, in my recent article, "A Twist in the Tale". Moreover, the sophistication provided by mathematical theories and high-speed computational infrastructure would not be sufficient to account for the huge profits that the American financial system raked up before the current economic crisis. Asians could easily replicate this type of sophistication. What the Asians do not have is the long tradition of Roman law and jurisprudence that provides the legal foundation for modern company-based organizations. This legal sophistication is what enables Western institutions to participate in economic activities with high intensity and speed.

In fact, the emergence of highly successful Asian diaspora communities in the advanced nations demonstrates that, at the level of individuals and families, Asians are quite adept at taking large risks and putting in disciplined efforts to gain huge long-term rewards. In the second half of the 20th century, many millions of Asians have traveled half-way around the world, and started their lives from scratch in foreign countries, to obtain huge increases in their lifestyles and educational opportunities for their children. It is at the level of the company organization that Western countries continue to hold the edge in the creation of economic wealth. Professor Cooper is definitely gnawing at these issues in his writings. To wit, he is perhaps unique among Western economists, to propose that after taking the corporate savings of America into account, Americans are saving enough for their long-term future. However, Professor Cooper's methods are mostly restricted to econometrics, whereas, as I have explained above, I would like to employ a general framework of law and jurisprudence, applied specifically to company organization, to study the comparative advantages that the advanced nations have in the creation of economic wealth.

Further, in my opinion, a large part of the willingness of American companies to take more risk globally can be attributed to the fact that the US dollar has been the predominant global reserve currency ever since the Second World War. The worldwide supply of dollars is controlled by the Federal Reserve bank of America which is constitutionally mandated to strive for price stability and economic growth only for America. This provides an extra safe-guard for American companies in risk-taking ventures around the world. Here is where a significant divergence appears between Professor Cooper's perspective and mine. Professor Cooper, like nearly every other Western economist, has identified the root causes of the East Asian crisis of 1997-98 to rest within Asia itself. Professor Joseph Stiglitz is the rare exception among Western economists, who went to great lengths to fault the International Monetary Fund (IMF) in bailing out American banks first from the East Asian crisis. However, my perspective goes much further:

The East Asian crisis was a result of cheap money from the advanced countries chasing high growth in foreign lands. The profits from that high growth accumulates over a period of four or five years. When it is time for the investors from the advanced countries to look elsewhere for growth opportunities, then lo and behold, a much larger amount of funds than those that went in have to come back home to the advanced countries, in view of the rapid accumulation of profits. So, unless the foreign country has already accumulated a large enough reserve of international currencies like dollars, yens or euros, there would inevitably be a currency crisis. In fact, the East Asian countries, through an export-led boom stretching to 25 year or more, had indeed, accumulated large reserves beforehand. But they proved to be insufficient when a huge inflow of funds took place during 1992-97 as a result of the Federal Reserve's lax monetary policy. When this money accumulated profits, many more dollars had to go back home in 1997, which resulted in the crisis. The Chinese have understood this lesson all too well, and that is why they are waiting this time around with a foreign currency reserve worth of 2 trillion dollars. The East Asian crisis, is in fact, a well-worn trick from the exploitation of the colonial era, as explained in the previous section.

There is nothing wrong in one country trying to obtain mutually beneficial economic growth with foreign countries. The problem arises when that one country engineers a crisis in a part of the world that has long been growing healthily, purely through currency manipulations, and a whole generation of Western economists write article after article that cover up the root cause. This is why I propose a wider legal framework which would enable America to finance the rapid growth of the emerging market economies, and obtain as a reward, economic growth of its own, all done in a transparent and stable manner. For this purpose, it is necessary not to worry about global imbalances, but instead to guarantee the stability of the global reserve currency. I might add here that there is a certain unnecessarily destructive aspect to Western economic theory that would not sit well with the emerging market economies. What they are looking for is constructive approaches to shared economic growth. By toning down American triumphalism, America can avail these shared economic opportunities from the emerging market economies for a long time to come. To note, it is a common misconception that destruction is the only route to innovation.

Please select the Director, IEO, IMF solely on merit

(Dt. July 29, 2009)

Note: The following is an open request that I had sent out to economics professors at top schools for writing reference letters on my behalf.

The Director of the Independent Evaluation Office (IEO) at the International Monetary Fund (IMF) is finishing his term at the end of this month. I have applied for to be his successor. I do not have any patrons working their connections on my behalf. I am proud to say that I am applying for this position solely on my merit. Over the course of the last 18 months, I have demonstrated outstanding abilities in analyzing the current global economic crisis thoroughly and proposing far-reaching solutions for it. I have written over 25 articles on the crisis. Among these, the major articles have been e-mailed to renowned economists. An annotated list of the original contributions I have made for this economic crisis is given below.

I had written to the following four renowned economists on July 13, 2009 requesting reference letters for my job application: Professor Edmund Phelps, Professor Edward Prescott, Professor Kenneth Rogoff and Professor Joseph Stiglitz. I had heard from Professors Phelps and Prescott before, in response to my articles that I had e-mailed to them. And I had commented several times on the articles written by Professors Rogoff and Stiglitz on Project Syndicate. So I had assumed that these four Professors would be willing to write letters on my behalf. But I have not heard from any of them so far. The deadline for the job application has passed on July 24, and the applications are probably being processed now. So, I am left with no option but to make an open request for reference letters from the other economists at top schools to whom I have been sending my articles.

With the onset of the current financial crisis, the IMF has once again found itself to be struggling with questions about its external credibility, its institutional governance and the co-operation from its member countries. However, the fundamental problem that the IMF faces is the challenge of dealing with rapidly unfolding emergencies. The other problems about its credibility, governance and co-operation are consequences of this fundamental problem of conceptually understanding a rapidly changing world. It is for this main reason, that the Director of the Independent Evaluation Office (IEO) at the IMF needs to have outstanding abilities to analyze and cope with the current crisis. I have attached a 2-page "Statement of Purpose" explaining why it would be in the best interests of the IMF to appoint me as Director, IEO. I would be grateful for any recommendation that the Professors would write on my behalf. The e-mail address to write a letter to is imf-ieo@russellreynolds.com. Thank you.

Sincerely,
T V Selvakumaran

Original contributions I have made for addressing the current global economic crisis

1. Proposal for de-centralizing the American financial system. De-centralizing would enable the local processing of price information about mortgage markets. This would make the system more stable and avoid the unnecessary accumulation of trillions of dollars in New York. This proposal was made in this article: http://selvasblog.blogspot.com/2009/06/new-perspective-on-global-economic.html

2. Re-interpretation of Adam Smith's universal opulence in terms of the universal civilization of Rome. Interpret the legal foundations of the Chinese political economy in terms of Confucian principles. Then study the developments in the current global economic crisis as the confluence of two ancient traditions of law. More generally, the implications that other legal systems around the world have on the global economy can also be considered. I have also made a proposal to consider pre-mature and ill-prepared attempts at Pax Americana to be the initial cause of depression-like scenarios. Examples: (i) efforts at resurrecting the gold standard by America was an initial cause for the Great Depression, (ii) President George W. Bush's Pax Americana policies lead to current economic crisis. These above proposals were made in this article: http://selvasblog.blogspot.com/2009/07/twist-in-tale-proposal-to-reconsider.html

3. I have proposed a theory of reverse-colonization in this article: http://selvasblog.blogspot.com/2009/07/new-perspective-on-global-economic.html. This theory subsumes the two main theories on global imbalances -- savings glut theory and de-coupling theory. This theory also finds a creative outlet for the fears of Western intellectuals by re-examining mercantilism. Reverse-colonization theory retains great explanatory power for predicting and anticipating the policy recommendations in the global arena, that would be proposed by Western economists in the next few years.

4. A partial solution for the unemployment problem: use the good offices of the new President to make the world a safer place for Americans to work. Make the arrangements for 10 - 12 million Americans to live and work abroad in the next 10 years. http://selvasblog.blogspot.com/2009/07/whatever-happened-to-liberal-agenda.html

5. A New Perspective on the Global Economic Crisis: Proposed a new price adjustment mechanism that would remove the massive arbitrage opportunity that the Fed and the Treasury have created on behalf of the Wall Street banks during the current crisis. This price adjustment mechanism demonstrates that the American financial system is capable of solving the crisis on its own. It is not necessary to transmit trillions of dollars of losses to the rest of the world by engineering a dollar devaluation (http://selvasblog.blogspot.com/2009/06/new-perspective-on-global-economic.html). Please note that my price adjustment mechanism was first e-mailed to Professors in September 2008 when Congress was discussing the $700-billion TARP bill (http://selvasblog.blogspot.com/2008/10/dt_3325.html).

6. Exchange rate stability versus global imbalances. Analyzed existing theories on global imbalances, including the savings glut theory and the de-coupling theory. Explained why they are seriously wrong. Recommended focusing instead on exchange rate stability during the next decade with the goal of re-gaining America's credibility in the geo-political scene. (http://selvasblog.blogspot.com/2009/06/new-perspective-on-global-economic.html and http://selvasblog.blogspot.com/2009/07/new-perspective-on-global-economic.html)

7. Durability approach to growth projections. Divide the global economy into two parts, based on the durability of economic theories. In those parts of the global economy that function based on securely founded economic theories (e.g., factory-based manufacturing, agriculture, emerging market economies, small & medium business that deal with low-tech activities), the prospects for growth can be estimated using the rational expectations model. Besides, studying the production process from a historical perspective, enables one to measure trends for productivity, trade and consumption. For the other part of the global economy, (i.e., the more advanced parts of the modern economy), a re-examination of what constitutes economic wealth is called for. Here, again durability is a crucial factor. Durability also has relevance for the interactions of the two parts of the global economy, and thus has implications for exchange rates. Using this durability approach, I was able to provide reliable estimates for China's growth, after hearing Premier Wen Jiabao at Davos in January. I was among the earliest to warn that China's stimulus spending alone would ensure 8% annual growth in real GDP for the next two years, without counting the exports sector at all (http://selvasblog.blogspot.com/2009/02/in-response-to-professor-kenneth.html). This prediction has now come true for the first year. See #9 below for further applications of the durability approach.

8. I warned against adopting Keynesian economic theory point-blank by the liberals in the following articles:
(a) Explained the links between Keynesian policies and colonial exploitation (http://selvasblog.blogspot.com/2009/04/in-response-to-professor-kenneth.html).
(b) Explained that not even Keynesian theory would justify the adoption of a massive one-time stimulus (http://selvasblog.blogspot.com/2009/03/comment-on-professor-bradford-delongs.html and http://selvasblog.blogspot.com/2009/03/comment-on-professor-joseph-stiglitzs.html)
(c) "Some perspectives on the relevance of John Maynard Keynes to the modern economy" (http://selvasblog.blogspot.com/2008/12/some-perspectives-on-relevance-of-john.html). This article elicited a response from Professor Edward Prescott, who is now trying to politely ignore me :- It was in this article that I first identified that not even Keynesian theory would justify a massive one-time stimulus.

9. Contributed to debunking the bond traders on Wall Street who appear regularly in the media to promote their own self-interested projections for the future. The topics of their propagandizing have included "Credit crunch", "De-leveraging", "New normal for growth". Already in my FAQ on the Financial Crisis (http://selvasblog.blogspot.com/2008/10/faq-on-current-financial-crisis-q1.html) which I wrote in October 2008, I had suggested to economists that focusing on the credit crunch would not be the wise thing to do. In view of the massive accumulations of capital in private hands, credit would flow sooner or later. All the government needs to do was to provide adequate liquidity, and then furnish the markets with clear guidelines about its intentions and plans. Unfortunately, the Fed and the Treasury chose to spend trillions of dollars by way of averting a credit crunch. Even worse, these institutions took it upon themselves to prop up the securitization markets and the secondary markets. The securitization markets and the secondary markets are like mushrooms on a rainy day. In a dynamic market economy, these markets spring up when needed. This unnecessary propping up of these secondary markets has cost the Fed trillions of dollars of spending, and now the funding for fiscal spending is severely constrained. Here lies the roots of the predicament of dwindling public support that the liberals find themselves today. They can't afford to be spending too much for propping up the financial system lest they have to make compromises on their priorities like health care and alternative energy. On the other hand, they don't want to recognize that there must be some negotiated settlement between the security owners and the property owners for the markets to function well. This is because dwelling on property rights is seen to be a give-away to conservatives (See the last paragraph below about Mr. Hernando DeSoto).

10. In March 2008, I had proposed to study the market mechanism by focusing on the duration of interaction between the buyer and the seller. This resulted in three articles:
(a) A New Perspective on the Role of Markets in an Economy (http://selvasblog.blogspot.com/2008/10/dt_9352.html)
(b) Update 1: Housing Example in Role of Markets (http://selvasblog.blogspot.com/2008/10/dt_4707.html)
(c) Update 2: A Marginalistic Interpretation of the GARCH model (http://selvasblog.blogspot.com/2008/10/dt_1704.html)
Article 10(a) elicited a response from Professor Kenneth Arrow, and article 10(c) from Professor Edmund Phelps. I have not heard from them since. Alas, they have declined to engage my ideas and proposals on the global economic crisis, just when the game has begun to warm up.


Finally, as somebody who has thought seriously about the global economic crisis, I would advise professional economists that Professor Joseph Stiglitz is perhaps the one Western intellectual that has a serious and deep grasp of the global economic crisis. For a long time, Professor Stiglitz's insights into the crisis were deadly accurate. Unfortunately, on October 20, 2008, Professor Stiglitz ran into this idiot, Hernado DeSoto in a Town Hall meeting at CUNY, New York. Mr. DeSoto managed to confuse Professor Stiglitz thoroughly. Ever since, Professor Stiglitz has not been the same at all. The video recording of this Town Hall meeting is widely available on FORA.tv. Mr. DeSoto, who claimed to be speaking as someone from a developing country, said that the root of the current crisis was that the financial system in the advanced countries has foregone the security of property rights. He said that the world's financial system was functioning simply based on paper-contracts. The gullible audience was lapping up his populist utterances and rewarding Mr. DeSoto with loud and frequent applause. The moderator, Professor David Harvey, a wise man, asked Mr. DeSoto if his proposal implied that all the trading in financial derivatives should simply be abandoned because they are not based on property contracts. Mr. DeSoto confidently says yes, they should all be abandoned!!@!$ Professor Stiglitz is the only economist who could understand the delicate and subtle arguments that are necessary to negotiate through the current crisis. Unfortunately, since he was confused by Mr. DeSoto's shenanigans, the liberal movement has become rudderless, sorely missing a wise leader like Professor Stiglitz.

Statement of Purpose
(attached with my application for Director, IEO, IMF)

The International Monetary Fund (IMF) is entrusted with the difficult task of overseeing the global financial architecture. This task is even more difficult for the reason that the IMF lacks political and judicial authority. We note that, in contrast, similar organizations at the national level -- the central bank, the finance ministry and the law courts -- are collectively vested with such authority. In addition, unlike issues concerning development and global trade which play out slowly and steadily in the international arena, the management of global financial issues requires skills in dealing with rapidly unfolding emergencies. It requires being prepared for highly uncertain situations where the information available is only partial and not too reliable. It is mainly for these reasons that the IMF needs to "conduct independent and objective evaluations of its policies and activities" through its Independent Evaluation Office (IEO).

With the onset of the current financial crisis, the IMF has once again found itself to be struggling with questions about its external credibility, its institutional governance and the co-operation from its member countries. However, as explained above, the fundamental problem that the IMF faces is the challenge of keeping up the skills and knowledge of its personnel amidst fast-paced economic developments. The other problems about its credibility, governance and co-operation are consequences of this fundamental problem of conceptually understanding a rapidly changing world.

The IMF has had some appreciation for this fundamental requirement all along. As a result, it has made intelligent choices in the past, to be prepared in advance for unforeseen crises situations, by arriving at broad consensuses among policy makers beforehand. However, with the current severe crisis in the American financial system spreading unchecked around the world, we see that while such a-priori policy consensuses are necessary, they are not sufficient.

The first major test of the IMF's performance came at the end of the Cold War. The republics of the Soviet Union broke away to form their own independent nations, as did the communist satellite countries in Eastern Europe. With American-style capitalism triumphant, these countries looked towards America for guiding them out of communism. They started by adopting market-oriented economic models, along with de-regulation of private enterprise, and privatization of assets owned by the former communist states. Moreover, with the end of Cold War, the world was taking to economic and financial globalization with unprecedented vigor.

The IMF consulted with policy makers and arrived at the Washington Consensus in 1989. It was an intelligent move on the part of IMF to develop such a theoretical platform, in advance, to deal with the upcoming challenge of transforming the former Soviet Union and the East-bloc countries into market economies. However, in a rapidly changing environment, it is only a matter-of-time before any rigid theory or method, constructed a-priori, comes up short. There is no substitute for having highly qualified experts, who can think quickly on their feet, at the forefront of the crisis prevention effort.

It is here that the IMF failed. The Washington Consensus arose from a focus on supply-side economics and disciplined monetary policy, a policy framework that had rescued America from the stagflation of the 70s. However, after the Cold War, the ground-reality was that a different world was beset by two major phenomena simultaneously, namely globalization and the waning of communism. The shortcomings of the Washington Consensus to deal with this new world were clearly articulated by Professor Joseph Stiglitz when he was the Chief Economist at the World Bank during 1997 -- 2000.

Unfortunately, instead of reviewing the Washington Consensus to adapt it to a rapidly evolving post-communist globalizing world, the IMF meted out a heavy-handed treatment to Professor Stiglitz. After he left his job at the World Bank in 2000, he wrote a detailed critic of the policies of the IMF in his book, "Globalization and its Discontents". As a result, the IMF encountered wide-spread criticism of its credibility and its governance.

It was in this background that the Independent Evaluation Office (IEO) was established in 2001 -- as an effort to address the criticism on IMF. To its credit, the functioning of the IMF appears to have improved significantly in the last eight years. The IMF has become more receptive to the concerns of its member countries, particularly those in the developing world. The IMF has shown more responsibility to promote trade and development around the world. In recent years, there have been moves to enhance the representation of the emerging market economies in the IMF. With improved public relations, the IMF has been able to get better co-operation from its member countries. The IEO has been closely involved in these developments at the IMF.

However, the coming of the financial crisis has made it important for the IMF to continue to make efforts to keep up with a rapidly changing world. I believe that my qualifications are specially suited for this fundamental requirement that the IMF faces. Over the last two years, I have studied the various developments that led to the global economic crisis. I have closely followed the research work of eminent economists, especially Professor Edmund Phelps, Professor Edward Prescott, Professor Kenneth Rogoff and Professor Joseph Stiglitz. I have conducted further investigations, starting from the proposals in their writings. I have also pursued my own ideas about the solutions to the current crisis. I have written 25 articles on various aspects of the crisis. These articles are available at http://selvasblog.blogspot.com.

With my training as a professional mathematician, and my studies in economic theory, I feel especially qualified for quickly bringing a conceptual understanding to the rapid developments in the crisis. It is only with such clarity of understanding, that one could guide the regular staff and the consultants at the IEO to adapt to a post-crisis world. Thus I feel that appointing me as the Director of IEO, would help the IMF improve its functioning and adapt to the requirements of the current global economic crisis.