POLB81 Lecture 9.docx

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Department
Political Science
Course
POLB81H3
Professor
M.Hoffmann- Universityof Toronto
Semester
Winter

Description
th Lecture 9 – POLB81 – March 11 2013. Governing Financial Crisis Governing Financial Crisis – Institutionalism 2008 financial crisis: video. A series of banks were failing in the US. When the Lemon brothers collapsed on Wall Street that’s when people started to realized that they’re in big trouble. There was an urgency of financial crisis on how some very serious republicans who don’t like government intervention were convinced to talk about days and weeks of financial collapse and it wasn’t just a problem in the United States. The cotangent effect makes it difficult to govern. The US injected 700 Billion dollars into the financial economy to try to stop the bleeding of the financial crisis. That was enough to soften the crisis to make it the Great Recession and not a Great Depression. When we talk about financial crisis we have to talk about the tools of multilateral approaches (IMF). History and Function of the IMF  Institutionalism: Governing through the IMF  History and Function of the IMF o Global institutionalism problem is a cooperation problem because financial stability is a public good. o Institutions were made to deal with financial stability and to be there to respond in financial crisis and make solutions. o The Great Depression was the cause of WWII which created a series of institutions that will help maintain global financial stability. It created GAAP, it set up the World Bank to make development, enhance economic growth, and they set IMF to try to insure global financial stability. o IMF’s job is to make currency exchange. IMF is set up to manage the currency exchange system. o In the Bretton Woods system, the currency exchange rate started off as Fixed Exchange Rates ($35=10z gold). The value of the US dollars was impeded to gold and every other currency was impeded to US dollars. Other currencies were fixed to the US dollars. The goal behind this was stability. This would remove the temptation to devalue currency rapidly to make your products cheaper in the market place. If everyone devalues currency, you get currency wars that create financial crisis. This worked for a while. o The financial crisis causes the US dollars to be overvalued. US had a flexibility to value its currency. It can’t just print money. Overvalued currency makes your products more expensive. US ran into economic trouble. o In the 1960s, US embarked in social spending and started fighting a war in Vietnam. The US could no longer maintain the fixed exchange rate. o 1971, the US said we are no longer impeded the US dollar to gold. 1971, was the official date where the US fully withdrew from the gold standard. o IMF had to change to Floating Exchange Rates where the market would determine how currencies were worth. IMF lost its entire being. There’s no more fixed rate system. IMF had to adapt. IMF moved general responsibility to maintain global financial stability. The guardian of the global financial system through technical advice, surveillance, and lending.  Technical assistance – IMF is a big consulting firm that will tell countries how to set up their economic system in order to best function. They give advice on how to run your economy.  Teaching Liberia who is a developing state.  The IMF also teaches industrial states and how to set up and run their economy.  This is not macroeconomic advice. This is on the ground governing practical help  Video:  “They governing in an efficient and legitimate way”  Why? Because of Financial/Economic stability = Political stability  Currency exchange low = exports goods.  “Practical Help”  “Best Practices”  Laws for financial management  Financial stability anywhere is financial stability everywhere. We care about it. Financial stability and political stability are linked. This is classic institutionalism perspective.  Economic Surveillance: When you sign up to be part of the IMF which everyone has, you agree to be watched. Key aspect of what institutions do (IMF):  Interdependence = Need for cooperation  Independent Assessment  Code of Conduct Monitoring  Stability  Prosperity  All countries continuously  In their own interest – in states best interest, helping them be better in sovereignty. Therefore, being part of IMF is on the states own interest.  A political/Neutral – IMF describe itself as neutral and independent from political debates of government within a country. IMF gives an independent assessment of what countries are doing.  Dialog + persuasion  States need this kind of help. It is a creature of states.  Third function: Lending  IMF has resources. It can act when countries get in trouble in terms of economic crisis. Any member country can turn to the IMF if they cannot pay their payments, trade deficits, can’t pay bills, etc. They can turn to the IMF for resources. IMF is the lender of last resort. It’s when you can’t get financing, currency speculating attacks, and banks are crashing, etc. You have to pay off public debt and turn to the IF. These resources are not no-strings attached. They have set ideas of what it takes on how to run an economy. When you need funds, to get those funds you have to agree to do specific things, to change policies in particular ways.  IMF is technocratic. They talk about independent expertise and knowing what is best. They consider themselves to be a political. There are a set of best pract
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