{"id":27107,"date":"2013-04-01T12:00:49","date_gmt":"2013-04-01T11:00:49","guid":{"rendered":"http:\/\/www.transcend.org\/tms\/?p=27107"},"modified":"2013-04-08T18:52:54","modified_gmt":"2013-04-08T17:52:54","slug":"hot-money-blues","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2013\/04\/hot-money-blues\/","title":{"rendered":"Hot Money Blues"},"content":{"rendered":"

Whatever the final outcome in the Cyprus crisis \u2014 we know it\u2019s going to be ugly; we just don\u2019t know exactly what form the ugliness will take \u2014 one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. In fact, controls may well be in place by the time you read this. And that\u2019s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland<\/a>.<\/p>\n

That\u2019s quite a remarkable development. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.<\/p>\n

It wasn\u2019t always thus. In the first couple of decades after World War II, limits on cross-border money flows<\/a> were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain<\/a>, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s.<\/p>\n

Over time, however, these restrictions fell out of fashion. To some extent this reflected the fact that capital controls have potential costs: they impose extra burdens of paperwork, they make business operations more difficult, and conventional economic analysis says that they should have a negative impact on growth (although this effect is hard to find in the numbers). But it also reflected the rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn\u2019t stand in their way.<\/p>\n

As a result, countries that did step in to limit capital flows \u2014 like Malaysia, which imposed what amounted to a curfew on capital flight in 1998 \u2014 were treated almost as pariahs. Surely they would be punished for defying the gods of the market!<\/p>\n

But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.<\/p>\n

It\u2019s hard to imagine now, but for more than three decades after World War II financial crises of the kind we\u2019ve lately become so familiar with hardly ever happened<\/a>. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.<\/p>\n

What\u2019s the common theme in these episodes? Conventional wisdom blames fiscal profligacy \u2014 but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.<\/p>\n

I am, of course, not the first person to notice the correlation between the freeing up of global capital and the proliferation of financial crises; Harvard\u2019s Dani Rodrik<\/a> began banging this drum back in the 1990s. Until recently, however, it was possible to argue that the crisis problem was restricted to poorer nations, that wealthy economies were somehow immune to being whipsawed by love-\u2019em-and-leave-\u2019em global investors. That was a comforting thought \u2014 but Europe\u2019s travails demonstrate that it was wishful thinking.<\/p>\n

And it\u2019s not just Europe. In the last decade America, too, experienced a huge housing bubble fed by foreign money, followed by a nasty hangover after the bubble burst. The damage was mitigated by the fact that we borrowed in our own currency, but it\u2019s still our worst crisis since the 1930s.<\/p>\n

Now what? I don\u2019t expect to see a wholesale, sudden rejection of the idea that money should be free to go wherever it wants, whenever it wants. There may well, however, be a process of erosion, as governments intervene to limit both the pace at which money comes in and the rate at which it goes out. Global capitalism is, arguably, on track to become substantially less global.<\/p>\n

And that\u2019s O.K. Right now, the bad old days when it wasn\u2019t that easy to move lots of money across borders are looking pretty good.<\/p>\n

__________________________<\/p>\n

Paul Krugman<\/i> joined The New York Times in 1999 as a columnist on the Op-Ed Page and continues as professor of Economics and International Affairs at Princeton University. He has taught at Yale, MIT and Stanford. He is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes. In 2008 Mr. Krugman received the Nobel Prize in Economics.<\/i><\/p>\n

Go to Original – nytimes.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Whatever the final outcome in the Cyprus crisis \u2014 we know it\u2019s going to be ugly; we just don\u2019t know exactly what form the ugliness will take. The truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment. Global capitalism is, arguably, on track to become substantially less global.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[105,51,55,146],"tags":[],"class_list":["post-27107","post","type-post","status-publish","format-standard","hentry","category-nobel-laureates","category-europe","category-capitalism","category-economics"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/27107","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=27107"}],"version-history":[{"count":0,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/27107\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=27107"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=27107"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=27107"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}