The International Monetary Fund emerged at the Bretton Woods conference in July 1944 where it was given a task to help the international economy recover after the two world wars and the instability due to trade policies. According to ‘’Article I of the IMF Articles of Agreement’’, it aims to ‘’promote the international monetary cooperation; expand the balanced growth of international trade; facilitate exchange rate stability; eliminate restrictions on the international flow of capital; ensure confidence by making the general resources of the Fund temporarily available to members in form of loans; and adjusting balance-of-payments imbalances in an orderly manner.’’
The IMF used to manage since 1946 until 1973, the exchange rate policy “adjustable peg” system. From 1944 until 1971, most Western European nations pegged their currencies to the U.S. dollar. The U.S. dollar was fixed to gold at $35 per ounce, and all other member countries' currencies were fixed to the dollar at different rates. This system of fixed rates ended in 1973 when the United States removed itself from the gold standard. With the free exchange rate and more and more open capital markets, this over value insured by multinational insurance companies such as AIG which sold protection against these pools of loans and when the default occurred most insurance companies could not cover what they had insured and the government had to step in since such insurance default would have triggered an international financial disaster. Then with mortgage backed bonds defaulting on their rate since borrowers were no longer making payments. We saw a complete collapse in the value of these bonds, which brought many lenders and investors under. The government once more stepped in and bailed out only the giants such as JP Morgan and other larger banks. However, most investors and smaller banks lost their entire capital and had to shut down. We also saw a trend in countries issuing hundreds of millions of bonds and selling them on the secondary market and incurring large debts and such debts were insured and also guaranteed by the IMF and other international structures, however as the crises occurred a lot of countries were left holding huge debt, such a big debt that they could not repay due to high interest, which leads the majority of these countries to sell their national wealth and issue and sell more bonds as a way to refinance their older debts and keep functioning and making payments on the interest. Many of these nations were also buying US CMOs which were guaranteed and insured and had an AAA rating since they were wrapped by GIC issued by Fannie Mae and Freddie Mac with low yields in order to offset their own debt.
One of the comments of George Soros that got my attention regarding the crisis of global capitalism "Unfortunately we are once again in danger of drawing the wrong conclusions from the lessons of history. This time the danger comes not from communism but from market fundamentalism. Communism abolished the market mechanism and imposed collective control over all economic activities. Market fundamentalism seeks to abolish collective decision-making and to impose the supremacy of market values over all political and social values. Both extremes are wrong. What we need is a correct balance between politics and markets, between rule making and playing by the rules."
This is to say that there are forces driven by the free market that determines prices in the market, which applies to the free and fair play market forces, under the normal, practical and realistic degree of free competition and moral values. The government can only step in if there are obstacles that impede the free play of market forces which can affect the preservation of freedom and individual economic choice from one hand, and the interests of the whole society on the other hand. This is the model followed by Islamic society during the time of the Prophet Mohammed (PBUH) who refused to determine prices when there was a rise in prices in Madinah and some people complained to him. He emphasized that there are forces "driven by the free markets" that determine prices in the market, further, he indicated that pricing may entail injustice inflicted on someone, one way or another and he (PBUH) does not want to indulge in any injustice. This indicates that both protection of economic freedom and choice and protection of public interest are valued as major objectives of market regulation in the Islamic system. When the society cultural standards and moral values go down, all functions of the Market go along with the general decline or stagnation. Here comes the role of an ombudsman, which has been implemented throughout Islamic history from the inception of the Prophet Mohammed (PBUH) until the end of the nineteenth-century. The ombudsman will supervise the activities and transactions taken place in the market from different perspectives, one is to make sure all activities and transactions are undertaken within the boundaries of ethical rules, free of corruption and monopolies, two, that all the activities and transactions are done with observation of the moral values and ethical principles not to harm society or the environment, and three, the ombudsman is charged with the function of ‘’ordaining what is known as good. This idea tells us that free and fair market needs a semi-governmental agency to observe the legal and moral values and rules in the market and prevent monopolies. The observer, who is the semi-governmental agency authority, should be just little below a judge who supervises from a non-participant observer point of view and gives final dictates on the compliance of transactions and economic relationships with the rules.
Well, in my observation I think that during the last few years, the free market system has almost failed and we saw the government step in and bail out multiple companies to the tune of trillions of dollars. Not only insurance companies and banks had to be bailed out, also multinational companies were bailed as well since it employed thousands of people. It prevented a major crisis that could have caused bank runs and bank failures and eventual uprising in the population. Thanks to the FDIC many depositor funds were not lost and were protected as well. We can also see a direct tilt toward government involvement when the government bailed many major companies and eventually merged Freddie Mac and Fannie Mae in an attempt to stop its failure and in the process; they reduce the stock to mere pennies and cut all dividends payout literally passing the loss to investors who found themselves from small fortunes to mere pennies. We also saw an increase in bond buying by the government in order to pump more money into the economy, which worked to a certain extent but has not resolved the issue in Soros point of view. In addition, yes, during the last few years we see an instance of free market failing and an absolutely tilt towards more government direct involvement in the free market.
I believe there is a middle ground in the global regulatory structure that needs to be put in place. For example, the FDIC and the IMF were actually great structures implement by the government. But as we saw the acquisition of Freddie Mac and Fannie Mae by the government and their merger, we also saw, investors lose millions of dollars and dividends as the stock was absolutely collapsed and the dividends pay cut out. One of the thing that was clear deception was the bail-out of most major banks with money programs such as TARP and other bond buying programs when other of hundreds of smaller banks were shut down and their asset distributed to other banks. That is a clear sign of Crony Capitalism. And such banks kept on lending in the same manner they did prior to the crises. Furthermore, knowing the treasury prices are high it gives local hedge funds the ability to make fortunes by hedging assets with the foreign government, which also entails a small inducement in corruption. For example, a local broker-dealer in Texas has been issuing bonds tied to the US treasury 15-year bonds yields. Knowing that other yields were higher in foreign sovereign bonds, they worked internal deals with the foreign financial institutions in order to make a profit on the market deficiencies. For example, they issued a 750 million USD bond paying a rate of 2% per year with a maturity of 15 years. They turned around and sold it to the Thai government, which bought it at 750 million USD. The broker-dealer received 750 million USD in cash. They took 250 million use and bought a Thai government bond with a face value of 750 million USD, 15-year maturity and a 0 coupon which they backed the principal of their bond with. Essential they have made a profit of 275 million used and still have plenty of capital left to cover the payments of their coupon. Their initial bond was backed by a US treasury bond essentially giving them a pass-through rating equal to the treasury bond rating and once it was sold they just made a swap with the Thai sovereign bond issued in dollar currency and profited on the market deficiency. And of course many Thai government officials made small fortunes and we can see in the future more companies work inside deals with foreign government officials in order to make such deals occur and make a profit from the market deficiencies.
In the neoclassical growth theory savings does not affect growth rate in the long run because the growth rate is determined and therefore affected by outside or external factors such as technological progress, a rate of labor growth. Within that theory, it is believed that an economy will always converge towards a steady rate of growth once it reaches that steady rate of growth at point A and passes point A, capital per worker will be falling, as an investment will not be enough to combat population growth and depreciation. Therefore, output per worker would decrease. Looking at the Neoclassical growth model mathematical function an increase in the saving rate would shift the function up. Therefore saving per worker will be greater than population growth plus depreciation, so capital accumulation would increase. Output per worker would increase. Initially, the economy would expand faster but eventually would go back to the steady state rate of growth that equals n. There would now be permanently higher capital and productivity per worker, but economic growth would be the same as before the savings increase. Given that savings rate increases from s to s’, when s increases at k' thus k increases to k'' (and y to y'') at point C’. At C’, the economy reaches a steady state growth rate of n. An increase in s will increase levels of y' and k' but not the growth rate of y. An economy will transition toward a higher steady state if there is an increase in its rate of saving or a decrease in its rate of population growth. The long run balanced rate of growth of a neoclassical economy is the constant external rate of growth of the labor force, n, and knowledge, g, and is entirely independent of the proportion of income saved.
