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A Scary Strategic Problem: A failure in imagination.

Edward Campbell

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Part 1 of 2

Maybe this doesn't deserve its own thread, but I couldn't find a closely related one, and I believe that economics drives strategy (at least in part) and so economics is germane to "International Defence and Security," and I hope it will provoke some discussion about economics impact on strategy and security and defence, so ...

This article, reproduced under the Fair Dealing provisions of the Copyright Act from Foreign Affairs, is a review of Martin Wolf's new book, The Shifts and the Shocks (which I have not, yet, read):


What Caused the Crash?
The Political Roots of the Financial Crisis

By Athanasios Orphanides

July/August 2015 Issue

Crises are an inevitable outgrowth of the modern capitalist economy. So argues Martin Wolf, chief economics commentator for the Financial Times, in his authoritative account of the 2008 financial crisis. Instability reveals itself in the form of shocks; even a seemingly small deviation from the norm can set off a major crisis. Consider the decline in U.S. housing prices, which began in 2006 and hit its nadir in 2012. In isolation, the trend appeared manageable. After a period of exceptionally high housing prices, U.S. policymakers initially welcomed the drop, which they saw as a much-needed correction to the market, a gradual unwinding of excess. They did not expect a crisis of the magnitude that eventually arrived; nearly no one did.

With characteristic thoroughness and clarity, Wolf identifies a number of culprits for this failure. At the broadest level, it was a failure of imagination. Bankers, regulators, and policymakers assumed that a long period of macroeconomic stability had made the economy invulnerable to shocks. In the United States and the United Kingdom, it had been many decades since the last major busts. Unfamiliarity, Wolf writes, bred complacency. “Why did the world’s leading economies fall into such a mess?” Wolf asks. “The answer, in part, is that the people in charge did not believe that they could fall into it.”

Wolf walks through developments in the United States, Europe, and the developing world, identifying key events and policies that collectively made the crisis the biggest, baddest, and costliest in a century. He pinpoints a host of troubling trends, including the global savings glut, an unsustainable credit boom, and an increase in the level of fraud. In the final chapters of the book, Wolf sketches a road map for the future, offering his vision for a more stable financial system.

Wolf’s book contains a wealth of illuminating details and sharp analysis. Two subjects, in particular, stand out: his critique of the mainstream economic ideas that held sway prior to the crisis and his analysis of the disaster in the eurozone. Wolf highlights a number of weaknesses in economic theory and practice that spurred the collapse, among them faulty modeling and shortsighted monetary policy. But his focus on economics comes at the expense of an equally important part of the story: politics. Political maneuvering, rather than flawed economic thinking and policymaking, is the key to understanding why financial regulations were so weak before the crisis—and also helps explain why, even now, relatively little has been done to strengthen them. But that narrative does not take center stage in his telling, even when it arguably should.


Prior to the slump, most economists—including Wolf himself—did not conceive of the possibility of a global financial meltdown. As Wolf writes, it was “partly because the economic models of the mainstream rendered [a crisis] ostensibly so unlikely in theory that they ended up making it far more likely in practice.” Regulators and investors blithely assumed, among other things, that people tend to make rational economic choices and that market prices reflect the true value of assets. This false sense of security made them careless: more willing to take risks and less concerned when warning signs arose. “Stability destabilizes,” Wolf writes, paraphrasing the American economist Hyman Minsky.

But the failures of economic theory alone cannot fully account for the crisis. After all, it is not unusual for economic models to contain simplifications. Most rely heavily on assumptions that do not wholly correspond to reality: frictionless markets, individuals who optimize with perfect accuracy, contracts that are enforced fully and without cost. Such assumptions are par for the course in economics, as they are in other fields of scientific inquiry.

When used correctly, economic models can be useful guides for policy; in the wrong hands, they can spell disaster. Before the crisis, some models did include the possibility of bank failures and financial collapse, but they did not focus on how to minimize fluctuations in the economy. The economy is simply too complex to be captured in a single model; every model has limits. Still, policymakers should not dismiss economic orthodoxy as irrelevant, even if some mistakes are inevitable. They should be at once familiar with its tools and respectful of its limits.

In Wolf’s telling, bad economic theory manifested itself in poor regulatory and monetary policy. When it comes to financial regulation, his case is convincing. In the run-up to the crisis, many mainstream economists insisted that self-interest acted as an invisible hand, guiding the market toward efficiency, stability, and dynamism. Reviews of the pre-crisis regulatory and supervisory approach in the United Kingdom and the United States have identified that part of the problem was a philosophy that markets are generally self-correcting and that market discipline is a more effective tool than regulation—a mindset that led to excessive deregulation.

Wolf singles out two especially harmful regulatory errors. First, under the Basel Accords, the global framework for banking regulation, banks have been allowed to classify government bonds as risk free. When a bank acquires a risky asset, it must have enough capital to hedge against the possibility of default. The Basel rules meant that banks holding sovereign debt did not need to accumulate extra capital. “The assumption,” Wolf writes, “was that governments would not default,” a belief that appeared less and less secure as the crisis unfolded in the eurozone. Second, governments, most notably in the United States, strongly encouraged firms to make it easier for people to borrow money to purchase homes, which led to a frenzy of mortgage lending—including to borrowers with little ability to pay their debts—and contributed to the unsustainable housing bubble.

Wolf’s critique of pre-2008 monetary policy is less convincing. He finds fault primarily with the practice of inflation targeting, whereby central banks identify a particular low target inflation rate and then attempt to steer actual inflation toward it. Prior to the crisis, central banks did this by raising or lowering interest rates, a transparent and predictable process that was believed to make the economy more stable. Quite the contrary, says Wolf. “Central banks did deliver stable inflation,” he writes, but that predictability led people to underestimate the amount of risk that nevertheless existed in the markets, which made the financial system more fragile. But crisis prevention is not the main purpose of monetary policy. Monetary policy should aim to achieve low and stable inflation and milder business cycles, which inflation targeting has done. The robustness of the financial system should be safeguarded not by monetary policy but by tighter regulations.


In his analysis, Wolf tends to depict economic policy as the practical implementation of economic theory. The reality is more complicated. Crafting policy is not merely an economic act but also a highly political one. Regulatory policies, for example, can reflect the whims of politicians, the pressures of the public, and the influence of lobbyists.

But Wolf keeps politics behind the scenes, even when they should be front and center. Regulatory policy failed not because of shoddy economic theory but mainly because societies have been unable to remove banking and finance from the orbit of political manipulation. Consider the decision to allow banks to treat sovereign debt as risk free. Eurozone governments benefited from this policy, as calling their debt risk free made it cheaper to borrow, facilitating greater levels of government spending. Banks, eager to lower their capital requirements, were all too happy to play along. This is one example of the symbiotic relationship between governments and banks that permeates banking around the globe.

Politics also played a defining role 
in the U.S. government’s decision to promote lending for home purchases, particularly through government-sponsored enterprises (GSEs), such 
as Fannie Mae and Freddie Mac. The regulatory failures surrounding GSEs cannot be blamed on faulty economic theory. In fact, in testimony before the Senate Committee on Banking, Housing, and Urban Affairs in 2005, Federal Reserve Chair Alan Greenspan identified the risk GSEs posed to the country’s financial system and pleaded for more regulation. He said:

    In the Federal Reserve’s judgment, a GSE regulator must have as free a hand as a bank regulator in determining the minimum and risk-based capital standards for these institutions. . . . We at the Federal Reserve remain concerned about
    the growth and magnitude of the mortgage portfolios of the GSEs, which concentrate interest rate risk and prepayment risk at [Fannie and Freddie] and makes our financial system dependent on their ability to manage these risks. . . .
    To fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later.

The same year, a bill was introduced in the U.S. Congress that would have tightened the regulation of GSEs along the lines Greenspan suggested, but support for the bill proved weak. In a 2008 op-ed for The Wall Street Journal, the economist Charles Calomiris and the lawyer and financial policy analyst Peter Wallison blamed the bill’s failure on political maneuvering by Fannie Mae and Freddie Mac. To curry favor on Capitol Hill, the companies presented themselves as champions of affordable housing. As a result, wrote Calomiris and Wallison, “Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained.”

To his credit, Wolf does recognize the corrosive influence of politics, taking issue, in particular, with the ways in which the financial industry uses its money and lobbying clout to shape policy. The pushback against postcrisis regulation reveals that such meddling remains alive and well. “This is one of the reasons why crises will recur,” Wolf writes. “Regulation will be eroded, both overtly and covertly, under the remorseless pressure and unfailing imagination of a huge, well-organized and highly motivated industry. This is not about fraud narrowly defined. It is more about the corruption of a political process in which organized interests outweigh the public interest.” Instead of dwelling on this point, however, Wolf diverts attention away from it, making flawed economic thinking the focal point of his story.

End of Part 1 of 2


Edward Campbell

Army.ca Myth
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Part 2 of 2


When it comes to Europe, Wolf identifies the political challenges inherent in creating a single currency across the continent, but he is less attuned to the ways in which politics also inform crisis management. Wolf describes the eurozone as a “polygamous monetary marriage entered into by people who should have known better, in haste and with insufficient forethought, without any mechanism for divorce.” The wedding was followed by an irresponsible honeymoon: debtor countries, such as Greece and Portugal, borrowed freely and spent recklessly, while Germany, the creditor spouse, built up a competitive export sector and an external surplus “matched by growing claims on the debtors.” When the crisis hit, the marriage turned bad: Germany blamed the debtor countries for wasting its money, and they blamed Germany for forcing them into destitution.

“The euro has been a disaster,” Wolf concludes. “No other word will do.” He justifiably reminds readers that he foresaw this outcome as far back as 1991, when the negotiations that led to the single currency were just concluding. He quotes from a Financial Times column he wrote that year, in which he judged the venture “in words used by the ancient Greeks of the path taken by a tragic play: hubris (arrogance); atē (folly); nemesis (retribution).” A day of reckoning appeared inevitable, even in the absence of the massive shock imported from overseas.

Wolf recognizes that the eurozone has always been more than an economic project. From the beginning, politics constrained its efficacy. Its design was flawed and incomplete. Seeking to avoid political resistance, European leaders intentionally designed the euro without building in a way for the currency union to deal with crises or correct macroeconomic imbalances. The misplaced hope was that if a crisis erupted, future leaders would find a way to handle it. In creating an imperfect union, European leaders acted irresponsibly; believing that it could succeed in spite of its shortcomings was nothing short of hubris.

If a poorly constructed eurozone explains why the continent was vulnerable to the crisis in the first place, policy blunders after the crash explain why it had trouble recovering. Many countries adopted austerity measures, slashing budgets and reducing their own borrowing, which turned out to be misguided. Economic growth slowed, “given that post-crisis private demand was so weak.” On the monetary side, Wolf pinpoints a number of missteps by the European Central Bank, including its failure “to ensure liquidity in debt markets.”

But again, the larger problems were political. The eurozone governments found themselves unable to work together to manage the crisis. Speaking in 2011 at a farewell event for Jean-Claude Trichet, the departing president of the European Central Bank, the former West German chancellor Helmut Schmidt highlighted the continent’s impotence. “All the talk of a so-called ‘euro crisis’ is just the idle chatter of politicians and journalists,” he said. “What we have, in fact, is a crisis of the ability of the European Union’s political bodies to act. This glaring weakness of action is a much greater threat to the future of Europe than the excessive debt levels of individual euro area countries.” Schmidt’s remarks, delivered in German at the old opera house in Frankfurt, were directed at Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president. Schmidt hoped to galvanize at least one of the two most powerful nations in Europe, but he failed to move either. At this critical moment, Europe’s economy was leaderless.


Wolf provides a relatively charitable explanation for why political considerations guided crisis management in the eurozone:

    In a financial crisis, creditors rule. In the Eurozone crisis, the creditor that mattered was Germany, because it was much the largest. The aims of any plausible German government, and certainly of one headed by Angela Merkel,
    the country’s popular, cautious and self-disciplined chancellor, have been relatively simple to understand: these are to preserve the Eurozone, but on Germany’s terms.

Like most creditor nations, Wolf writes, Germany saw the suffering of debtor countries as their own fault. To exculpate itself, Germany argued that the crisis was a product not of current account imbalances—in which it was complicit—but of fiscal deficits. And because Germany “believes in tough love,” according to Wolf, it did not want to provide generous aid to countries, such as Greece, that it blamed for excessive borrowing.

A less charitable explanation is that Germany did whatever it could to avoid responsibility. Every crisis generates losses that someone must assume. In theory, the losses from a collective failure, such as the one in the eurozone, should be a collective responsibility. But without a common government to manage a fair and efficient distribution of the costs, countries acted in their own self-interest, guarding themselves against losses wherever and however they could. Stronger countries, such as Germany, exploited their leverage to avoid their share of the costs and impose losses on the constituents of less powerful countries.

Two episodes, largely absent from Wolf’s narrative, clarify the extent of the loss-shifting game. The first occurred in early 2010, when Greece, buckling under years of unsustainable debt accumulation and overconsumption, turned to the International Monetary Fund for help. According to leaked IMF documents, however, a decision to write off Greece’s debt, which the country badly needed, was delayed due to resistance from countries whose banks held Greek bonds. As Karl Otto Pöhl, former president of the Bundesbank, Germany’s central bank, said in an interview in Der Spiegel, the resultant IMF program “was about protecting German banks, but especially the French banks, from debt write-offs.” According to an internal IMF account of the May 2010 meeting of the IMF’s Executive Board, to gain support for a plan that would delay a debt restructuring and thus shield their banks from losses, the Dutch, French, and German chairs “conveyed to the Board the commitments of their commercial banks to support Greece and broadly maintain their exposures.”

Merkel did eventually force losses on selected holders of Greek sovereign bonds, but only after allowing German banks the opportunity to sell their holdings—a violation of the 2010 promise. The loser in all of this was Greece. According to the IMF, Greece’s debt-to-GDP ratio skyrocketed, from 126 percent in 2009 to 177 percent in 2014. Real GDP per person sharply declined, falling by 25 percent between 2007 and 2014.

The second episode took place in October 2010. At a summit in the French commune of Deauville, Merkel and Sarkozy decided to use their countries’ veto power in the euro area to block temporary assistance programs to eurozone member states—unless France and Germany could first impose losses on the private creditors of those states. This policy, known as private-sector involvement, was a serious misstep. The realization that the French and the Germans could force losses on private lenders alarmed those who held sovereign debt, which led to the deepening of the crisis throughout the eurozone, beginning with the collapse of the Irish economy. Germany, of course, came out on top. By making euro-denominated sovereign debt of peripheral states less attractive, Merkel masterfully created an implicit subsidy for Germany from the euro area periphery.

Throughout the crisis, Merkel has faced the same choice again and again: act to diffuse the crisis and avert catastrophe in the eurozone at the risk of losing support at home or enact policies that are sure to be popular in Germany but that will spread misery elsewhere. Put this way, Merkel’s decisions seem understandable—even inevitable. As Jean-Claude Juncker, the president of the European Commission, has said about the euro crisis, “We all know what to do, we just don’t know how to get reelected after we’ve done it.”


Outside Europe, the global economy is on the mend. But inside the eurozone, the outlook remains bleak. The eurozone, in its current form, cannot last. Wolf succinctly identifies the separation that has emerged between “the national level of accountability and the Eurozone level of power,” which has allowed Germany to wield outsized control over other nations. “This structure cannot hold,” Wolf writes, “and, if it can, it should not.”

In his final chapter, Wolf suggests several ways to mend the rocky marriage, including creating a proper banking union; converting some existing government debt into eurobonds, which could serve as a safe common asset; and giving the European Central Bank more freedom to intervene in government bond markets. But Wolf recognizes the large obstacle in the way: Germany is currently powerful enough to impose its views on the rest of the eurozone, blocking such reforms.

The eurozone needs a European solution. But politics are national, and no political body exists to protect the eurozone from individual countries that would rather pursue their own narrow interests. Europe needs leaders who are willing to risk short-term political costs to advance the common good, despite the misalignment of political incentives. Judging from the record of the past five years, however, the eurozone’s Greek tragedy may remain just that.

I was struck, early on, by Martin's Wolf's notion that "A failure of imagination," complacency, if you like, was a main cause of the financial crisis, which, I believe, exacerbated underlying security issues ~ like Russia's dissatisfaction with the West's forays into South-Eastern Europe: a sphere Russia regards as its own.


Army.ca Legend
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This article could go under many different threads, from "Grand Strategy" to the "Election 2015" to "Making Canada Relevant again". The essential point, I think, is that disruptive technologies are forcing systems that currently exist towards failure mode, simply because the current systems are not able or willing to adapt. We see various examples running at different speeds here in Canada, the slow moving demographic evolution as people move to the West, the faster economic transformation as business and capital flow westward and the incredibly disruptive arrival of communications technology in the form of the Internet removing the "need" for many "gatekeepers" and intermediaries in politics, economics, academia and so many other areas of life. The book "The Big Shift" provides the Canadian context for this, but we see the stresses in the EUZone, the disruption in the Middle East, the rise of China and the positive and negative effects it is having on the region and even the general collapse of the US political system in providing any answers to the pressing issues of the day. When Donald Trump is drawing crowds because he is speaking about issues other candidates from both parties won't, then there is a serious issue.

The biggest issue of all isn't that things change (they always do), but rather how the change is going to be managed for a successful transition. Digging in and fighting to the last taxpayer to retain the perques and privileges of power is unappealing at best, and the general historical result of that process is armed revolution and the arrival of "The Man on the White Horse" to create stability. Most of us know how that ends.

Sadly I certainly don't know the answer, and don't know anyone who does either. This is going to be a long, drawn out process.


Disrupting Government
Posted by Jeff Carter on July 18th, 2015

I have been watching Uber blow up governments all across the world.  In France, taxi drivers didn’t like their cartel being upset, and became violent towards Uber cars and drivers.  In St. Louis, Ed Domain was almost killed in a taxi cab that had no insurance.  He is exposing the taxi cartel for exactly what it is.  In NYC, Mayor De Blasio wants to put a cap on Uber growth.  Amazingly, even the left wing NY Times disagrees with the Mayor.

Uber took matters into its own hands by creating the “De Blasio feature” on it’s app.  I think they can take it further and win by utilizing the Phone2Action app that Jeb Ory developed.  Jeb is a friend of mine.  We met through the University of Illinois entrepreneurial program.

I began reading a book a friend gave me, Freedom From Fear.  It’s a historical recounting of the FDR administration.  Interesting reading to me from a number of perspectives.  For example, FDR used the fireside chat as his medium of expression because at the time all the media outlets were run by conservatives.  Of course, today the exact opposite is true-so as a conservative candidate I need to be creative using the internet to get my message out.

One of the things that is striking in the book is FDR’s first hundred days. No president since has had as momentous a start.  The rationale was two fold for the New Deal.  First, there was The Depression.  The Depression was amazingly deep.  In one Oklahoma county, in aggregate farmers went from receiving $1.2M for their wheat crop to $7000.  For the entire county!  Second, FDR made the case that America was once an Agrarian society and was transformed into an Industrial Age.  Factories were replacing farming as the engine of GDP growth.

Today, we are quickly moving to a robotic information age.  Some economists think the US understates its productivity.  The McKinsey Group has compiled a list of more than 100 disruptive technologies that provide consumer surplus, the extra benefit from technology above the price paid.  It’s hard to measure a lot of traditional statistics because progress and innovation happen unevenly.  Some companies invest early, some take time to adopt new things.

When FDR instituted his new programs, he didn’t get rid of many of the old agrarian rules that existed.  As we move forward into a new age, it’s important that policy makers get rid of all the old agrarian rules, and most of the industrialized regulations that don’t fit with the way the future economy works.  Unfortunately, most regulators and political candidates are stuck in the mud.  Like Mayor De Blasio, and candidate Clinton who skewered the gig economy, they are tied to the way things used to be.  They are out of touch.  It’s important to remember these regulations are not natural laws of man.  They are artificial and were written in a time where many of the things we are discovering and innovating around weren’t feasible, or even dreamed about.

When Presidential candidate Rand Paul was in Chicago he was asked what parts of government he would eliminate.  He said, “The Import-Export bank and the Interstate Commerce Commision.” (my mistake, on ICC, regret the error)  He is right and there is much more we can eliminate or make efficient with technology.  But, it will be a battle royale because it’s extremely hard to cut a government program once instituted-or change a regulation once written.  I love the way candidate Paul talks about individual liberty and freedom.

Tech initially toppled major corporations.  Motorola and Kodak are shells of themselves.  Now, technology has the opportunity to eliminate wide swaths of government and all the cronies, cartels, employees and economic imbalances that come with them.  As a society, we shouldn’t fight that.  We should embrace it.  Automation of government will make things cheaper for taxpayers.  Elimination of old fashioned out of step government will make things better for society.

Edward Campbell

Army.ca Myth
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No one will ever accuse the famous American economist Anne Krueger of lacking imagination, as she proves, yet again, in this article which is reproduced under the Fair Dealing provisions of the Copyright Act from the Financial Times:


Anne Krueger: the economist in a hurry

Elaine Moore

August 7, 2015

She defied convention to reach to the top of both the World Bank and the IMF. More daring still, she has argued since 2001 that it sometimes pays to write off a country’s debts

The lengthy and rancorous debt crisis in Greece has elicited many responses in Europe, from the furious to the sympathetic to the frustrated. But one controversial idea is gaining traction amid the noise, although the woman credited with introducing it is proving hard to pin down.

Anne Krueger is busy. The 81-year-old former first deputy managing director of the IMF and ex-chief economist of the World Bank is in demand from government officials, central bankers and academics. All of them want to hear from her how the foundations that underpin global debt might be transformed to help indebted countries, without the system being wrecked.

This explains why Krueger can only make time to meet me by delaying another interview and sacrificing her Saturday morning. The day before, she was guest of honour at a conference in London, the next she flies to Iceland in her role as government adviser before travelling to Washington, where she is professor of international economics at Johns Hopkins University. And then on to Puerto Rico, where it later emerges she has written the official report on the island’s debt problems.

Any suggestion that this schedule sounds strenuous is given short shrift. “I don’t think it’s particularly busy. What’s busy?” she says. “I travel less now than I did when I was at the IMF.”
It’s true that any toll from the air miles is hard to discern. Petite and smartly dressed, she seemingly has more energy than most of the weekend trippers who mill around us in the opulent surroundings of London’s Mandarin Oriental hotel.

The jewel-coloured jacket and neatly styled hair speak of a career spent in the public eye, though her conversation is peppered with academic neologisms. This, combined with her habit of speaking quickly, leaves me occasionally lagging behind, at which point she loses some of her tutorial benevolence.

There is little preamble, not just because the crisis in Greece warrants urgency but because her interest in these topics was never limited to a nine-to-five working week. Retirement, she insists, has never crossed her mind. When I ask her to describe herself, she says simply: “I’m an economist.”

Born in 1934, Krueger rose through the ranks of some of the world’s most influential organisations at a time when few women entered the workforce, let alone trained as economists. From Endicott, New York, a town only 13 years older than she is, her precocious interest in economics was driven by the events of the second world war and the subsequent creation of organisations like the IMF, tasked with promoting the world’s financial stability.

“I was always interested,” she says. “Economics is a function of understanding the world. If you understand it you can say, ‘Here is what’s not working.’ It’s about understanding behaviour.”
After decades in academia, she was lured to the World Bank to become chief economist in the mid-1980s, the second person to hold the role and still the only woman to do so.

Four years later she returned to academia before she was tapped by the Bush administration to become the first deputy managing director of the International Monetary Fund in 2001. She was 67 at the time and former staff members recall her as a brilliant economist who dared to keep conversations focused, something her predecessors had not.

“I hold her in high regard but she was disliked by some because her personal manner could be brusque,” says Peter Doyle, an economist and former IMF staffer. “People at the IMF like to talk for ever. She wouldn’t give them more than a minute and it drove them nuts.”

Misogyny, he adds, was also a potential factor. “You have a woman [Christine Lagarde] at the head of the IMF now but don’t imagine life for a female staff member was plain sailing. In those days it was a boys’ club. Important conversations were happening in the men’s room and there was a way of speaking and raising issues. Then Anne arrives and she is very bright, intimidatingly so, and very sure of herself. It rubbed some people up the wrong way.”

“She’s a piece of work,” says another ex-member who asked not to be named. “She’s very smart and very energetic but she loves the idea of markets and not the participants.”

Krueger herself dismisses the idea that working in the World Bank and IMF was difficult. International organisations are different creatures, she says, and learning their systems takes a while. “But one of the big virtues of the IMF and the World Bank is the degree to which they evolve and adapt.”

This ability did not, however, stretch as far as supporting her suggestion — first aired in a speech in 2001 and born from Argentina’s chaotic default, then the biggest in history — for rewriting the way in which critically indebted countries might be rescued.

The idea, she says, is simple. Governments should be able to declare bankruptcy, just as companies do. Instead of bailouts and lost decades of austerity they should be able to wipe the slate clean and start again.

“It’s not rocket science,” she says. “If you get to a stage where a country’s debt is so large that it cannot grow, then you need to rethink how you help that country.”

While it may not be rocket science, Krueger’s idea shocked global markets and remains highly contentious. Proponents of the free market in the US and elsewhere are horrified at the idea of interference. Their pressure contributed to the IMF’s decision not to back the proposal at the time and, say some ex-staffers, damaged her credibility.

“We thought we had a chance,” she says of the plan’s demise. “Was I surprised? No. Disappointed? Yes.”

Officially the idea was dead.

But behind closed doors it never went away. Global debt markets can be difficult to conceptualise in their vast scale and since the financial crisis, governments have been borrowing more than ever, taking their debt burdens to $58tn, according to research by McKinsey.

The importance of debt in oiling the wheels of capitalism has led some to sound alarm bells at its newly inflated state.

Greece, where international creditors bailed the country out of a devastating debt crisis just three years ago, has seen its public debt jump from 126 per cent of GDP in 2009 to 177 per cent in 2014. Ukraine, Argentina, Puerto Rico and Venezuela are all flashing warning signals that they too may struggle to repay what they have borrowed.

When countries run into trouble, the bailouts received from international organisations are usually accompanied by brutal public spending cuts and unpopular austerity measures that can fuel discontentment and instability within the country.

Consensus is growing that something must be done and Krueger’s idea is touted by some as the answer. Backers have included the influential economist Nouriel Roubini and the FT’s Martin Wolf. Pope Francis recently said that he too supported the idea of a global bankruptcy process and after voting in its support, the United Nations is reviewing a proposal of the idea.

Even the private sector appears more enamoured.

“Anne Krueger was the one who put the idea on the map a long time ago and now it’s back,” says Leland Goss, head of the ICMA, which represents the world’s largest banks and investors. “And actually I don’t completely disagree with it in abstract, though there are practical problems.”

Krueger professes herself pleased but not surprised. As global leaders tussle over the idea, she is engaged with her work at the university and by the debt crisis in Puerto Rico, dubbed America’s Greece.

“I always thought the idea would come back,” she says coolly, “and I still think it will be put into practice. But it could take another serious crisis before it is finally in place. And there will be a next crisis, though where it comes from is likely going to take everyone by surprise.”

Elaine Moore is capital markets correspondent at the FT

Should whole countries, like large corporations ~ think Lehman Bros ~ be allowed to file for bankruptcy? (Lehman Bros filed for bankruptcy when it had $(US)639 Billion in assets and $(US) 619 Billion in debts; Greece's GDP, in contrast, is only $(US)237 Billion and its debts are only 175% of that, i.e. about $(US)415 Billion.)

It is, on the surface, a shocking idea ... but ...

Why not?

If Lehman Bros was not too big to fail, if it's collapse did not "sink the world," then why is Greece so different?

Brad Sallows

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Are they talking about bankruptcy - selling off assets to compensate creditors, and writing off any remaining debt obligation as a loss to the creditors - or about simply telling creditors "You're SOL"?

What are the assets proposed for sale?  What prevents an asset sale followed immediately by "nationalization"?

Edward Campbell

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Brad Sallows said:
Are they talking about bankruptcy - selling off assets to compensate creditors, and writing off any remaining debt obligation as a loss to the creditors - or about simply telling creditors "You're SOL"?

What are the assets proposed for sale?  What prevents an asset sale followed immediately by "nationalization"?

My guess is that creditors would be SOL for the very reason you cite: nationalization.