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Ed Conway @EdConwaySky
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THREAD: My @thetimes column this week asks why on earth no one will admit that part of the reason for the last crisis (and the next one) is our decision, decades ago, to abolish capital controls? Technical as it sounds, this is a MASSIVE deal…
2. For all that they have a bad name these days, capital controls (limits on flows of cash between countries) used to be a permanent part of how all govts managed their economies. They were a crucial cog in the monetary system set up at Bretton Woods. Here’s Keynes on them:
3. If you want fixed exchange rates & independence to set your own exchange rates, you need cap controls to prevent money leaking from one interest rate system (country) to another. Hence this famous trilemma:
4. Bretton Woods broke down in 1960s/70s with this Nixon speech. The oft-cited explanation was US fiscal profligacy. But there was another explanation: City of London financiers had developed a massive workaround for capital controls- the Eurodollar market
5. Lots more on the history in my book on Bretton Woods, “The Summit”. Go on, buy a copy. Before it goes out of print……
6. Since the 70s we have been living in a world (mostly) without capital controls. With no limits on the flow of money around the world. This is a massive shift - but economists usually ignore it. Too complex, doesn’t fit in with macro models etc
7. In case you were curious, this is the document that enshrines free movement of capital. The OECD’s Code of Liberalisation of Capital Movements. Essentially if you want to be a member of the club of developed nations u need to agree to this:…
8. Now clearly there are big (& well-rehearsed) probs with cap controls: they were often misused by despots & idiotic regimes trying to prevent outflows. They‘re blunt & easy to avoid. Then again you cld make a similar case against taxation and no-one’s suggesting abolishing that
9. But since we agree on the probs w/ cap controls let’s also agree on the probs caused by abolishing them. In a world w/o capital controls it’s easier to shift money to tax havens. Inequality is greater. Financial systems are more prone to booms/busts. Which brings us to 2008.
10. What really went wrong in 2008 was a collapse in this financial plumbing. Capital flows went into reverse and those most reliant on them suffered most (eg US, UK, eventually eurozone). @adam_tooze’s new book Crashed is the best account of this yet…
11. By the way this is a subtly but crucially different version from the global imbalances/savings glut interpretation. This Borio paper explains why (TLDR: gross flows are what matter, not just net):…
12. The odd thing is that save for a bit of IMF chin-scratching post crisis, few economists have spent much time pondering how much of the 2008 problems - and their aftermath - was down to the removal of capital controls. I find this quite alarming.
13. Best explanation I can come up with is that this financial stuff is too complex, too difficult to measure. So politicians obsess with more visible economic indicators: GDP, trade flows etc. that also allow them to convince themselves they have traction over their economies
14. But the reality is v different. Ironically, even as nationalism is on the rise, the financial world remains truly transnational. Borders are irrelevant w/I capital controls. Good @adam_tooze blog hits on this here:…
15. The fact remains that the current global set-up - floating fx rates and free movement of capital - makes us deeply vulnerable to major financial crises. Nothing done since 2008 has done much to change this. And that’s before one touches on the socio-economic implications
16. So what to do? A good start would be actually facing this problem head on rather than having our heads in the sand. Which is kind of what my column is about:…
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