Crisis Detection and Prevention

I discuss crisis detection and prevention based on experiences chairing an inter-agency crisis prevention group (while at the U.S. Treasury), working as a strategist on Wall Street, and advising a global macro hedge fund. The paper was published as a chapter in “The 10 Years After” the financial crisis volume published by the Reinventing Bretton Woods Committee.

My views differ from many recently offered.

I conclude with eight actionable ideas to improve crisis detection for investors and officials.

For full remarks:

International Money: Interview with Professor Richard N. Cooper

Professor Richard N. Cooper – advisor to many U.S. Presidents on international monetary affairs – was recently interviewed by the Center for Financial Stability on his decades of experience at the center of international monetary policy.

Highlights include:

  • Evolution of the international monetary system,
  • Insights into Nixon Shock (cessation of the gold standard),
  • System of floating exchange rates,
  • Recent revelations regarding the 1944 Bretton Woods Conference,
  • China and measures to move forward,
  • Proposals for the future.

We thank Kurt Schuler and Robert Yee for such a wonderfully insightful exchange and Richard Cooper – Maurits C. Boas Professor of International Economics at Harvard and formerly Under-Secretary of State for Economic Affairs, and Chairman of the Federal Reserve Bank of Boston.

To view the full interview:

Hanke on IMF pressure from politicians…

The FT published my letter “Not the first time IMF has succumbed to pressure from politicians.”

A recent FT editorial as well as story indicated that the IMF’s Independent Evaluation Office found that the “IMF repeatedly succumbed to political pressure from European governments during the eurozone debt crisis”.

This is not the first and only case in which the International Monetary Fund has been manipulated by politicians, and it certainly is far from the worst.

The full letter is available at

Future and History of Global Capital Markets

CFS partner, Jack Malvey from BNY Mellon, created a wonderful guide to financial market history and factors driving change into the 21st Century.

We are grateful to Jack for allowing us to share his presentation with CFS friends.

Although we rarely distribute outside research, today, markets confront challenges of epic proportion. Simply put, a glance back at the last thirty years is insufficient.

Analytics, data, and an appreciation of history are in our DNA. Hence, CFS hosted “Bretton Woods: The Founders and the Future” with long-term takeaways for markets and economies. Similarly, Senior Fellow Kurt Schuler’s Historical Financial Statistics (HFS) database – with contributions from over 80 academics – is a treasure trove of information and a popular part of our website.

Most importantly, thanks again to Jack for sharing his outstanding work integrating the past with the future. It is no wonder that a recent Bloomberg story referenced him as “one of the most-respected figures in the bond market.”

Given the enormous scope of coverage, Jack would be grateful for any thoughtful commentary.

The full presentation is:

Australia at Bretton Woods

Selwyn Cornish and I have a CFS working paper out on “Australia’s Full Employment Proposals at Bretton Woods: A Road Only Partly Taken.”

At the Bretton Woods conference, Australia proposed that full employment be a primary goal of international economic cooperation. Australia’s ideas were connected with its historical experience: three enormous financial and economic shocks in the two generations before Bretton Woods that disrupted employment.

The United States in particular opposed Australia’s proposals. They did receive a hearing after Bretton Woods, but never became part of the fabric of international economic cooperation. Happily for Australia, since Bretton Woods it has avoided shocks of the magnitude it experienced in the two generations before. Australia’s proposals remain of interest, though, both because many countries are still far from full employment and because the Bretton Woods institutions have become involved in labor market reforms as part of broader structural economic reforms in member countries.

The paper takes advantage of the knowledge of Australian archives that Selwyn Cornish has built up over the course of his career, which includes a longtime position as the official historian of the Reserve Bank of Australia. I presented the paper at a conference about Bretton Woods held at Yale University in November. A revised version will likely appear in a volume springing from the conference, to be published by Yale University Press. Selwyn and I welcome comments, which we will consider for incorporation into the revised version.

The Money Makers

Eric Rauchway’s new book The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace will interest most of you who read this blog. The economic parallels between the 1930s and recent years are more instructive than we may care to admit.

Eric Rauchway is a professor of history at the University of California-Davis. He spoke at the CFS conference at Bretton Woods last year, giving a foretaste of some of the material in the book. The subtitle gives a pretty complete idea of what the book is about. Franklin Delano Roosevelt is first in the subtitle as he is dominant in the book. Rauchway is determined to rescue FDR’s reputation from former advisers who had their own agenda to promote when they wrote, years later, that FDR was a dilettante with no real understanding of monetary policy. Rauchway argues that FDR had coherent ideas and that his policy on the gold standard through the whole of his administration was well considered both in its economics and its politics. Rauchway points out that FDR made some formal study of economics as a student at Harvard; that well before his presidential bid he showed interest in monetary questions; and, perhaps most important of all, he was open to ideas and sources considered unorthodox, such as the Cornell University professor George Warren Pearson.

As one who is no expert on FDR but who has worked for two politicians, I have observed that politicians rarely have the time or inclination to become expert on the arcana of monetary theory and policy. However, the astute ones—and FDR was a superlatively astute politician—have an ability to rank issues, examine varying views on them more open-mindedly than many experts (because they are less attached to particular approaches), and gauge whether public opinion on them is ripe for change. FDR came into office facing economic catastrophe, and he found a way out that worked.

A generation later, Milton Friedman and Anna Schwartz would argue that the Federal Reserve bore a large measure of blame for the Depression, and that different policy by the Fed would have avoided deflation and limited the downturn to being an ordinary recession. Over the course of another generation, other economists would come to accept their argument. In 1933, FDR did not have the luxury of waiting for those conclusions and he lacked control of the Fed. The gold policy was the one tool at his disposal. I think Rauchway exaggerates the depth of FDR’s monetary thought, but he is correct that FDR’s gold policy—which jolted the American economy back to life—showed a high level of strategic thinking. The advisers who later branded FDR a dilettante misunderstood that he was in reality an experimenter, willing to be unorthodox and eclectic because the times called for experimentation.

What FDR gave with one hand, though, he partly took away with the other. Many of the regulatory policies of the New Deal hampered recovery, working against the benefits of appropriately loose monetary policy. As with the responsibility of the Federal Reserve for creating or at least greatly aggravating the Depression, Rauchway glosses over the clumsiness of New Deal regulation and the harm it did.

The book really shines in its weaving of the interplay between monetary policy, wider economic policy, domestic politics, and geopolitics. The Depression was more than an economic calamity: it threatened to cast the world political order into the flames. FDR understood the dangers posed by aggressive dictatorships and the role that economic policy could play in helping contain them in peace and winning the fight against them in war. Rauchway assesses the interplay between the economic and political forces of the time more judiciously than any previous account I have read.

I will not discuss Keynes, who also appears in the book’s subtitle, because here both Rauchway and I have less to say that might be new to you, though it will be new to the average reader. Suffice it to say that, as with the material on Roosevelt, it ably assesses both the economics and the politics of the time.

Did I mention that Rauchway can really write? He has an ability to keep different narrative threads clear through the warp and woof of events. He also has a knack for crisp summary (example: in 1944 “The United Nations was still very much a notion; so too were many of the nations in it” under German or Japanese occupation.)

The book is pleasing to the eye and to the hand. I have only one complaint for the publisher: having met Eric Rauchway in person, I can attest that the jacket photo does not do him justice. Something to be corrected for the paperback edition, perhaps.

World Bank Archives Online

The World Bank has begun to digitize its archives and place them online. I have used the archives a couple of times, and though the staff have been helpful, the hours are limited, one must wait for materials to be delivered, and for people outside of Washington the trip is expensive and time-consuming. So, bravo! I expect little additional material of interest on the Bretton Woods conference to turn up, because of what is already in the IMF Archives. Eventually, though, there will be miles of files for scholars interested in studying how economic development and aid evolved after World War II.

State of the International Financial System: House Committee on Financial Services Hearing

The U.S. House Committee on Financial Services announced a full committee hearing titled “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.” The hearing is scheduled for March 17, 2015.

It will be informative to see how Secretary Lew assesses backdoor currency wars (see pages 2, 9, and 10 of the New York Society of Security Analysts presentation).

The Morgenthau Diaries Are Online

Henry Morgenthau, Jr. was Secretary of the Treasury from 1934 to 1945, a period that of course included the 1944 Bretton Woods conference. Fortunately for historians, he was a compulsive chronicler. His collection of speeches, memos, transcripts of meetings, and other documents, termed the Morgenthau Diaries, runs to hundreds of volumes. They have been available for some years on microfilm, but at a price so high that few libraries have them. Now the diaries are are available for free online. They offer inside perspective on a tumultuous period of American and world history.

Morgenthau was the president of the Bretton Woods conference and the head of the U.S. delegation to the conference, and his diaries from that period (July 1-22, 1944) contain transcripts of many of the delegation’s meetings behind closed doors. The American delegates could be blunt in their private assessments, as these words from a July 1 meeting show:

MR. [Harry Dexter] WHITE: Those are the large countries. The smaller countries all want larger quotas. The most troublesome will be Australia, who is participating to an extent far beyond the proper role of a country of her size and importance. But they are going to insist on a larger quota and some other things that I suggested before.

Readers interested in Bretton Woods will find much to instruct and occasionally amuse them. Among other things, the diaries show clearly that Federal Reserve chairman Marriner Eccles, who is not recorded as having said a word in the conference sessions, was highly active behind the scenes.

At Bretton Woods the United States was at the zenith of its relative economic power, as the leading economy whose home territory was nearly untouched by the enemy. The attitude of the American delegation reflects its awareness of that fact. Reading the diaries, though, one must that remember that however fascinating they are, they are but a part of the story. What the Americans wanted was not always what transpired in conference, and their private scheming had counterparts in the private scheming of other delegations, which is less well recorded but which has recently received scrutiny from assiduous researchers.

(Hat tip to Eric Rauchway, who spoke at the 2014 CFS Bretton Woods conference.)

The Economist on “The 70-Year Itch”

In The Economist this week, there is a terrific article The Bretton Woods agreements: The 70-year itch.  Highlights include:

– America learned the benefits of economic co-operation the hard way. Its failure to create institutions to help steer the world economy after the first world war exacerbated the Great Depression and paved the way for the next conflagration.

– Yet today’s pre-eminent powers seem to have forgotten this lesson.

– If John Maynard Keynes were alive, he would sigh not just at the risks in all this economic nationalism but also the huge missed opportunity. Perhaps it is time to send another group of dignitaries to New Hampshire.

The full article is at

The piece is similar to my Forbes column Lessons from the Summer of 1944.

The full column can be viewed at