Archive for January 27th, 2003

What’s the big deal with foreign exchange controls?

January 27, 2003

 


I wanted to talk about the possible effects of exchange controls, people always think they are milder that they eventually end up being. Then I received this (in Spanish) from Roberto Rigobon, a Venezuelan who is a Professor at the Sloan School at MIT. He defintely can do it better and is more qualified.


 


What’s the big deal with foreign exchange controls?


By Roberto Rigobon


 


MIT


 


I do not understand why we Venezuelans have to get so worked up about foreign exchange controls. After all, since when do they last more than three months?


 


It is customary for authorities to say:” In the past the controls were not implemented correctly, we- who know how to control- will do it well”. I understand that today’s authorities are different. But a great friend once told me something that is absolutely true: “Countries that impose capital controls always claim they are different, -but surprisingly, they look identical at the end-they all collapse in the same way”
 
Foreign exchange controls is only a reflection of the ignorance of the economic authorities to handle a situation that is escaping their hands. It is exactly what a scolded kid does when he throws a temper tantrum on the floor. Since when is this an act that deserves our minimal attention? The question is not if the exchange control will last, it is knowing what will happen during and after it.



Today the Venezuelan Government is desperate for financing, and its only alternative is the Central Bank and the domestic financial system. I know that the Central Bank law says that it is prohibited to lend to the Government, but this was not really designed to be followed. It will be one of a gazillion laws that has been violated. And to be sincere, it is not as if the reputation of the Government will be drastically damaged for such an event-it has done worse things.

Thus the Government will expropriate the savers and the Venezuelan Central Bank. The typical mechanism is: the Government goes into debt through the financial system-issuing bonds that banks are forced to purchase. Whether it is because the Central Bank increases legal reserves and allows them to use such instruments as part of reserves, or simply because they open a desk where you can discount them at a sufficiently juicy price. In this transaction two things occur: The implicit indebtedness of the Government increases so much, both in the Central Bank and in the banking system- and since the monetary base increases, in a country with free mobility of capital, there is capital flight and reserves fall.

Let’s look at this in more detail. Forcing the banking system to accept Government bonds implies that savers have implicitly lent money to the Government. Of course, nobody sane would lend money to this Government if they knew what they were doing. In these circumstances, before depositing in the banking system, account holders would take their money out. Ah!! But that is what capital controls are good for-to stop savers, that do not want to lend the Government money and that have excess liquidity, from having any recourse.

Unfortunately, for the Government, capital flight can only be stopped for a limited time-in general, very limited (three to six months maximum). What ends up happening is that Governments are forced to freeze bank accounts-which implies a massive devaluation and expropriation of the account holders.

Now, expropriating account holders has never been a good idea. This has happened a few times in Latin America in 1989 and 2002 in Argentina, in 1990 in Brazil, in 2000 in Ecuador (To mention only a few) By the way, in each of these occasions (i) depositors lost between 60 and 70 percent of their savings, (ii) the Governments devalued the currency at least a factor of three (let’s see, today it is at Bs 1800 per US$, mmmmm….Bs. 5400 could be a good number, if history repeats), (iii) and even more important, each Government ended up leaving through the back door because the economy turned unmanageable-I don’t want to think what will happen in Venezuela where things are already unmanageable
 

Foreign exchange controls are not the problem, they are the symptom of the inability, of the ignorance, of the incredulity, and of the arrogance of those Governments that think they know more than savers. And certainly the savers do not have a graduate degree in economics, nor a Ph.D. from
Chicago, but dummies they are not.

Only someone with one neuron (which it obviously needs to breathe) will think that controls are an alternative for the Venezuelan situation. Thus, to the mono-neuronic economists that thought of this terrible idea, tighten your belts because what is coming is a stampede.

Best blog day pictures

January 27, 2003


I have taken many pictures of the girl on the left, but this one by radcap is certainly much better than any that I have taken and the best proof that “Blog Day for Venezuela” worked well. I don’t know the source of it, unless radcap is Venezuelan. She actually just stands on a truck that sells bottled water to marchers. Some will call her a capitalist pig, I call her delightful, thus I post it for posterity as another important document of our political crisis.

Chavez on economics and politics from Porto Alegre

January 27, 2003

Some quotes with comments on things Hugo Chavez said this weekend during his vacation in Porto Alegre, Brazil:


On economics:


-What is happening in Venezuela is only an advance of the great battles that we will have this century which are beginning, between neoliberalism and alternative currents which are surging, because the venezuelan is an alternative to neoliberalism.


Well, Venezuela was never or ever  much of a “neoliberal” country to begin with. The State controls everything and owns most of the wealth. As an example, Venezuela has very few gas stations because the number is decided by the PDVSA. The exchange rate has always been determined by the Government, which seldom has allowed the rate to float. Finally, what is the economic alternative that is being developed? Economic Amateurism?


-Exchange Controls are indefinite


There is an honest one! However, he should have told his Minister of Finance who said they would be on for only six months or the Central Bank Director who said they would be on only for as long as oil production was down. (Maybe that is indefinite!)


-He is considering applying a tax to “speculative capital”, explicitly mentioning the so called “Tobin tax”.


Well, there is very little speculative capital in Venezuela. The Stock Market has been dead since Chavez has been in power and there is a debit tax for each financial transaction of any size of 1%, which makes speculation quite difficult, if not impossible.  Second the Tobin tax proposal was to establish a worldwide cross-currency transaction tax to reduce speculation in markets that trade billions with trades that last seconds. Reportedly Chavez is considering the tax to be 10% versus 0.1%-1% of the Tobin tax proposal. If such a tax is established, the black and gray markets will be the real winners. You can buy stocks or bonds in local currency that trade in NY in dollars, thus this becomes a synthetic exchange mechanism. (It has been on since last Wenesday, only hours after the exchange market was suspended). Then there are the tehories that speculators reduce volatility, but I will not get into that.


-We will establish price controls


Don’t need to comment on that one.


On politics (page A-2, El Nacional):


-The only alternative to get me out is a recall referendum. The solution to the crisis is not elections now..this violates the Constitution


Not quite. As a matter of fact it is legal for him to resign and one of the two Carter porposals is an amendment which is very expedient if 15% of the voters petition it, there could be elections in June via this mechanism and defuse the crisis.


-I put away my rifle…but I keep it and if the oligarchas do not accept changes in peace, like Che Guevara said, noises of combat and machine gun fire will thunder.


Nice guy, what a democrat!


-I may close some TV stations


Ditto

Adding good salon.com blogs I like to my links

January 27, 2003

I am adding links on the left to my favorite salon.com blogs which I not only read regularly because I enjoy them (They are good, but I am sure there are many good blogs I don’y enjoy), but also  their owners appear to be very nice people. (The world needs a lot of those!). So here they are in no particular order:  Secular Blashemy, Radio Free Blogistan, Fried Green AlQaeda’s, The Raven and Andrew Bayer is Dreaming of China.

Follow

Get every new post delivered to your Inbox.

Join 11,813 other followers