Who Are You, Mr Malpass?

Moscow, April 09, 2019 — Business Systems Consult. On the 09th of April 2019 David Malpass starts his term as a President of the World Bank. What is known about the new World Bank’s President?

His public carrier started in 1984 when he was 28 in a Budget Committee of the US Senate, in administrations of President Reagan and President Bush Sen., in a Joint Economic Committee of the US Congress, in the State Department (focusing on Latin America). In 1993 David Malpass left the government service and worked in Bear Sterns & Co as an economist for 15 years until its acquisition by JP Morgan in March of 2008. Having left JP Morgan in June of 2008, he established his own consulting company and continued to participate in the activities of the Republican Party. He became an author of the seventh chapter in The 4% Solution: Unleashing the Economic Growth America Needs, a book published by George W. Bush Presidential Centre. Later 4% economic growth became one of the corner stones of President Program of Jeb Bush, aimed at “aspire America to greatness again”. He was a regular contributor to Wall Street Journal and Forbes in 2003—2016. He speaks Spanish, French, and notably, Russian.

It is interesting to analyse his economic publications and views. Being a politician not a theorist, he puts forward the ideas without exhaustive discussion from a research point. But he does it in a logical manner with full understanding how bureaucracy works. The article in a news magazine is not an academic publication, calculations is beyond the scope. It is worth noting that he is very consistent in his views. What did he write about?

Mr Malpass consistently opposed financial system and the real economy. This position played a low-down trick in 2008 when he underestimated the influence of the problems in the financial sector on the real one. Sometimies his opponents remind about it although many scholar textbooks on economics are built around the idea of neutrality of monetary and financial policy. This discussion in often looks like self-assurance as it is usual when there is a talk about ideology but not the objective fact. And in this discussion he took a position against mainstream.

Malpass’s favourite word is “sound”. His chapter in “The 4% Solution…” is titled as “Sound Money, Sound Policy”. He is certain that the aim of monetary policy is a stable and sound dollar (and other exchange rates). He claims that this stability should be guaranteed for the near 20-50 years because only speculators benefit from volatility. On the other side, high volatility undermines the investment attractiveness of the American economy and spends the investors’ ability to take risks on the excessive exchange rate risks. Moreover, the dollar should be strengthening to increase the investment attractiveness of US economy. The mechanism for realisation of this program is to enforce G7 (sic in 2012!) and G20 to impose the stable currencies, and in particular, to “state in a G7 communiqué that the US policy is for the dollar to be strong and stable”. Moreover, the gold standard should be restored to some extent: he appeals to use “FOMC statements to measure the dollar against the value of gold”.

He goes even far: “the current policy is based on the view that the value of the dollar should be set by markets over an unlimited range of values with the expectation that the dollar will trade up and down with US economic fundamentals. This is very far away from the stable-dollar policy that we need, because it creates tremendous uncertainty, discouraging investment and jobs”.

It is worth noting that institutional realisation of trade through the open markets or burses increases the overall level of systemic financial risks. The discussion of risk spreading and compensation mechanisms is presented in other our article.

Quantitative easing, notes David Malpass, turns into the growth in government debt, finances government spending and leads to crowding investments out. The zero-rate policy is a trap for FED. In fact, it is a corrupted symbiosis of big banks, federal and state governments, poorly managed federal agencies and funds, and unaccountable spending. It is similar to the bad practices of naïve communism: “To each according to his needs”. He points: “The zero-rate policy only benefits mega-borrowers like federal and state governments, big banks, and big corporations—a group that does not create many private-sector jobs”.

It is interesting that while being a partner in his own consulting firm, he claimed FED to increase the interest rates to escape from the zero-rate trap.

In fiscal policy he is a proponent of decrease in government involvement in the economy. The taxes should be decreased to stimulate the industrial production in the US. The decrease of tax rates, the economical growth, the increase in tax collections— that is the receipt of fiscal reform. But to accomplish it, the habits and procedures of law-making in Congress should be changed:

“The current debt limit presents impossible choices to fiscal conservatives—either approve a debt limit increase to cover spending that has already occurred or shut down the government or risk defaulting on debt. Every time this choice has been presented to Congress, the result has been more debt and more federal spending”.

He called for the special regulation aimed at compensating the comparative advantages the developing economies have due to economic backwardness. The investment attractiveness of the US economy is one of the ultimate goals for the economic policies.

Finalising, the new World Bank President will be significantly more imaginative than his predecessors. Let’s wish him the success in improvement of world financial system. This time is different!

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Опубликовано 09 Apr 2019 Author Magister ludi

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