Here you can find my article published by Financial Times website today. It is about economy, reforms, PR and mad men.

I have not written in English for quite some time as we discussed Poland-related matters. This post is of global interest so I use the only global language – globbish (i.e. simplified English).

In the recent article in Financial Times professors C.Reinhart and V.Reinhart warn that crisis is not behind us, that we are in the middle of it. The looked at financial crises in the past 200 years and found that way to often policy-makers call the crisis off way too early. A quote:

Często gdy dzieją się skomplikowane rzeczy mamy tendencję do skupiania się na szczegółach, a nie dostrzegamy spraw wielkich. Dzisiaj w Polsat News około 20:40 ujawnię pewne niepokojące fakty, dotyczące kwot przekraczających 50 mld złotych. Potem napiszę o tym na blogu.

Dzisiaj w Dzienniku jest mój tekst pt. Kto ujarzmi potwora biurokacji, w którym podaję szokujące i mało znane dane o liczbie zatrudnionych w administracji publicznej. Na przykład czy wiecie, że w 2009 roku, gdy był kryzys i rząd ogłaszał oszczędności, liczba urzędników wzrosła o 26,000 !!!

Poniżej slajd z mojej prezentacji z danymi pokazującymi dramatyczny wzrost zatrudnienia w administracji. Dzisiaj premier Tusk powołał dziewiątego wiceministra w resorcie finansów. Gratulujemy ministrowi finansów Jackowi Rostowskiemu, który powinien być wzorem oszczędności dla innych. Ministerstwo Gospodarki ma sześciu wiceministrów, MSWiA pięciu, MNiSW sześciu,  MSZ siedmiu.

Nowe: Rzeczpospolitej jest artykuł na temat wynagrodzeń w administracji, które silnie rosną. Zatem mamy na raz silny wzrost zatrudnienia i silny wzrost wynagrodzeń i cały czas słabe efekty pracy (np. kompletny brak zaufania obywateli do administracji centralnej wg. Eurobarometru). Administracja powinna być mała, dobrze opłacana, efektywna, a praca tam powinna być traktowana jak wyróżnienie, a nie dwuletni czyściec przed skokiem do sektora prywatnego. Na niektórych przedwojennych grobach na Powązkach widnieją napisy: urzędnik państwowy, żył lat 72. Wtedy to brzmiało dumnie.

What a day! Stocks in US tanked almost 10% across the board  for no reason. Greek issues were mentioned, but in fact Greek parliament passed belt tightening bills, so it was positive news. Later we found that it was a mistake, someone sold billions instead of millions of shares (or futures) and Procter& Gamble was mentioned as the company that was sold and fell more than 20%, Accenture was another company that took a beating. Then there were computer programs and automated trading, exactly as on Black Tuesday in 1987.

Ok, now comes the tricky part. How come a broker mistake leads to near 10% collapse of US stocks, which then leads to 10% collapse in CAC40 futures, and to 11% collapse in Nikkei250 futures. I know that we have a global economy, but there is something inherently wrong with the way financial markets function. Beacuse it is so similar to Black Tuesday, one should ask a person behind the Black Tuesday collapse. Richard Bookstaber, who spent 40 years as risk manager on Wall Street and who invented portfolio insurance which caused Black Tuesday wrote a book “A Deamon of our own design” that explains what went wrong. In short, we need to reduce leverage, simplify financial instruments and install circuit breakers.

So far record low interest rates encourage leverage, politicians plan more regulations which means even more complicated financial products, and as we saw today circuit breakers do not exist. So as a former central banker I have this little suggestion to my colleagues central bankers and regulators. Stop Basle 2 1/2 pep talk, stop repeating the same mistakes over and over again. Read Richard Bookstaber book. And European politicians should get necessary reforms on fast track, especially in PIIGS countries, but elsewhere as well.

Od ponad pół roku prezentuję następujący pogląd na tym blogu:

- problemy Grecji są niezwiązywalne, bo uwzględniając koszty starzenia się społeczeństwa, olbrzymie zadłużenie i deficyt budżetowy, oraz perspektywy dwuletniej recesji, dług publiczny Grecji włączając przyszłe zobowiązania prawdopodobnie przekracza już 1000% PKB (tysiąc). Nie istnieje politycznie możliwa skala cięć i podwyżek podatków, która mogłaby ograniczyć proces narastania długu w Grecji. Dowodem jest seria strajków i strajk generalny zapowiedziany na 5 maja. Jedynym sposobem ograniczenia wydatków w Grecji jest brak pieniędzy, czyli odmowa refinansowania zadłużenia.

- strefa euro może wyjść z tego kryzysu fiskalnego wzmocniona tylko w wyniku szybkiego podjęcia koniecznych reform przez kraje południa Europy. W obecnej sytuacji, gdy brak marchewki, najlepszą motywacją do reform jest strach rządów krajów południa Europy przed bankructwem.

Many developed economies are facing huge debt burden ralated to financial crisis and to aging population. The first factor is related to falling tax revenues amid slow growth and to large public spending related to saving the bankrupt banking sector. But this is peanuts compared to the second factor. The second factor is related to the fact that old generation will have pensions financed by the young generation in the form of much higher taxes or financed by massive increase state borrowing, ie. huge budget deficits. For example as estimated by the European Commission the replacement rate (ration of pension to last wage) in many countries is high and cannot be sustained in the future. Five highest in Europe are:  Greece (73%), Italy (68%), France (63%), Spain (58%)  and Poland (56%). Very few countries implemented pension reforms that take aging into account. For example in Poland budget financed pensions will fall to below 30% replacement rate in 2060. It yields stable public finances at the cost of falling living standards of the old generation. It remains to be see whether such low replacement rate is politically sustainable.

Price level in Great Britain over 350 years

Few days ago IMF has published a concluding statement after its regular article IV consultation with Poland. People and institutions learn as time goes by, for those who like to see these changes I suggest looking at IMF policy recommendations given to Asian countries after 1997 crisis and comparing with those given to countries after 2008 crisis. But do not take me wrong, it is good that people learn from their past mistakes.

IMF statement has “surprised” some economists, take a look at Dr Piatkowski comment (he has spent some time in Washington working for Bretton Woods institutions). He rightly notes that IMF praises Poland for engineeering large discretionary fiscal stimulus which raised fiscal deficit from 2% to well above 7% of GDP. I have noted on this blog that Polish finance minister is a modern version of Dr Jekyll and Mr Hyde, he tells foreign investors and FT that Poland runs completely different fiscal policy then the rest of the crowd, ie. we are fiscally prudent. But at home he generates (or tolerates) one of the largest structural deficits in the EU and adopts massive creative budgeting.

IMF key recommendations are as follows: do not reduce fiscal deficit too fast (this is easy, as government has not proposed any real fiscal tightening measures) and if zloty continues to strengthen reduce interest rates and intervene of the FX markets. IMF – in politically correct language – also calls Fedak/Rostowski proposal to capture OFE (pension second pillar) savings insane (quote:  “We are concerned that this could be seen as a more fundamental reversal of pension reforms …“).

Ernst and Young and IBnGR prepared the Higher Education Strategy 2020 for Poland on the request of the Ministry of Science and Higher Education. English language translation of the strategy is here.

Comments are very welcome. Final version of the strategy will be presented to the ministry after the consultation process and after the evaluation by reputed British institute specializing in higher education issues.

Polish version of the strategy and formal consultation process takes place at www.uczelnie2020.pl

New IMF global outlook has been released. IMF predicts almost 4% global growth in 2010.  It will attract media attention as the key message from the IMF. But there is one paragraph that should have attracted even more attention, a quote:

“Due to the still-fragile nature of the recovery, fiscal policies need to remain supportive of economic activity in the near term. The fiscal stimulus planned for 2010 should be fully implemented”.

IMF repeats the policy consensus, that we should continue to print money, run huge fiscal deficits as long as necessary, i.e.  as long as private demand remains weak.  Such policy recommendation is no surprise, after all anything against the policy consensus would be blocked by the board. So why bother, lets flock together around the wrong recipe, again.

IMF did not learn much during the crisis. US universities’ mafia that rules IMF cannot do any better. To see this clearly let me repeat the key paragraph from the IMF article IV consultation with the United States in 2003, it read:

“While monetary policy has responded aggressively to the economic slowdown, further easing may still be required if the recovery does not regain momentum. With inflation having fallen to near post-war lows and interest rates close to the zero bound, the appropriate bias is toward aggressive and preemptive action to support a healthy recovery. Although deflation risks in the United States appear modest, the FOMC’s strong signal of its readiness to act, and its willingness to use a broader range of policy instruments should deflationary pressures intensify, is welcome”

Yes. Exactly when the biggest asset bubble in the history was buiding at the light-speed, IMF was worried about deflation, hailed US zero interest rates and advocated that US should consider adopting other measures, such as quantitative easing. There could be no worse policy recommendation at that time.

It is high time that IMF does change. That it provides solid policy advice instead of flumsy policy consensus, which led to massive crisis of 2008, and will likely lead to another big crisis in the coming years, the crisis of developed countries sovereign debt. Recently CDS market priced in higher risk of sovereign default in rich countries that the risk fo corporate default of some large corporates located in these countries. Before IMF publishes its WEO and GFSR in Spring 2010, it should rethink its mission. We need policies that prevent crises, not ones that avoid one crisis at the price of creating another one.