These are some of the interesting research papers submitted at the ‘Jackson Hole Symposium’ and could not help but share it. There is a very interesting paper on ‘Cross-Border Capital Flows’. Restrictions on loan-to-value ratios and debt-to-income ratios are the basic credit scoring tools, which loan officers are supposed to use while doing credit assessment. There are hundreds of books on this subject-one interesting one is- Credit Scoring and its Application by Lyn C Thomas. This again boils down to asset based lending versus cash flow based lending. In the case of a mortgage, there is the underlying collateral and this is the basic philosophy of the Federal Reserve under Chairman Greenspan; using monetary policy to artificially inflate asset prices, which gives an illusion of wealth and then using those inflated assets as collateral for the credit creation at the consumer level. When the asset value cycles turn down, we may have the kind of problems, which we witnessed. Conceptually it is easy to say ‘Counter Cyclical Policies’ but the basic question is who to determine when to apply these policies; thus it boils down to the ‘timing problem and unfortunately our existing tools of asset price theories are inadequate to address this fundamental challenges and if anybody can perfectly time asset price upturns and downturns, he or she will be a trillionnaire. The synchronized movement in global asset prices and linking it with VIX is an interesting analytics though the proposed solution of restricting capital mobility through ‘targeted capital controls’ is the wrong way to go about it. This synchronized movement in global asset prices and the inter-relations among the monetary policy conditions of the US, capital flows and the leverage of the global financial system is largely on account of the fact that 70% of the international trade is denominated in US$ with US$ being the primary reserve currency of the world. The global linkages, trade and cross-border capital flows will only increase in coming decades and the only way the international community can create a balanced global financial system is by creating multiple global reserve currencies, which could be used for settling international trade, which means full capital account convertibility in all dominant economies of the developing world as well as deep & liquid capital market, where Monetary transmission mechanism is effective and inflation is well contained, so that their currencies are a store of value. This also means, reforming the European Union’s financial architecture by completing the unfinished agenda of institutional reform.
Posted on: Sun, 08 Sep 2013 02:45:44 +0000