Question

1) What are the Goals of the World Bank and the IMF? Why are some people upset and protesting about the World Bank and IMF?

2) Give the pros and cons of Flash Trading and Dark Pools. How and should the U.S. government regulate them?

3) If the British pound and Euro are both appreciating relative to the dollar, how does this impact exports and imports, AD and GDP? What should the Fed. due to respond?

4) What happens to the value of the dollar if the European Central Bank (ECB) increases its money supply and lowers interest rates? How will this impact the value of the dollar, exports and imports, AD and GDP?

5) What are 5 financial innovations and deregulations that led to the financial crisis in 2008? What are 5 policy responses by the Federal Reserve and the U.S. Government and Treasury department that helped us to get out of the financial crisis? Who are the winners and losers?

6) Explain the “flight to quality” that happened in Germany due to the Greek Debt crisis in 2010 and explain how this impacts the price and interest rates of German and Greek bonds? Who does this help and hurt?

Answer 1

1). The International Monetary Fund and the World Bank were both created at an international conference convened in Bretton Woods, New Hampshire, United States in July 1944. The goal of the conference was to establish a framework for economic cooperation and development that would lead to a more stable and prosperous global economy. While this goal remains central to both institutions, their work is constantly evolving in response to new economic developments and challenges.

The IMF’s mandate. The IMF promotes international monetary cooperation and provides policy advice and capacity development support to help countries build and maintain strong economies. The IMF also provides medium-term loans and helps countries design policy programs to solve balance of payments problems when sufficient financing cannot be obtained to meet net international payments. IMF loans are short and medium term and funded mainly by the pool of quota contributions that its members provide. IMF staff are primarily economists with wide experience in macroeconomic and financial policies.

The World Bank’s mandate. The World Bank promotes long-term economic development and poverty reduction by providing technical and financial support to help countries reform certain sectors or implement specific projects—such as building schools and health centers, providing water and electricity, fighting disease, and protecting the environment. World Bank assistance is generally long term and is funded both by member country contributions and through bond issuance. World Bank staff are often specialists on particular issues, sectors, or techniques.

There is no question that the IMF and World Bank continue to be amongst the most relevant and significant powerful norm-setters, convenors, knowledge-holders and influencers of the international development and financial landscape. This Inside the Institutions sets-out some of the most common criticisms of the World Bank and IMF under three broad lenses: democratic governance, human rights and the environment.

Democratic governance

Structural under-representation of the Global South

One of the central criticisms of the World Bank and IMF relates to the political power imbalances in their governance structures where, as a result of voting shares being based principally on the size and ‘openness’ of countries’ economies, poorer countries – often those receiving loans from the BWIs – are structurally under-represented in decision-making processes.

Undermining democratic ownership

The issue of political power imbalances is exacerbated by another long-standing critique of the Bank and Fund: that the economic policy conditions they promote – often attached or ‘recommended’ as part of loans, projects, technical assistance, or financial surveillance – undermine the sovereignty of borrower nations, limiting their ability to make policy decisions and eroding their ownership of national development strategies. This is particularly the case for the IMF as ‘a lender of last resort’ for governments experiencing balance of payment problems.

Biased and inconsistent decision-making

The Bank and Fund have also been heavily criticised for the role played by the political expediency of important shareholders in its decision-making and choice of interventions, including its support to dictatorships. The IMF’s decision to break its own rules and support the highly controversial Greek loan programme, agreed in 2010, prompted Brazil’s Executive Director to the IMF to protest that, “… the program … may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bail-out of Greece’s private debt holders, mainly European financial institutions.”

Weak ability to learn from past mistakes

The IMF’s Independent Evaluation Office (IEO) was set up in 2001 to conduct evaluations of the policies and functionalities of the institution with the aim of enhancing the learning culture, strengthening credibility, and supporting institutional governance and oversight. On the World Bank side, the Independent Evaluation Group (IEG) was created in 2006, integrating several individual accountability mechanisms, and is charged with evaluating the activities of the entire World Bank Group and determining what works, what doesn’t and why.

Effective impunity for harms caused

In the 1980s, the Bank was beset by a string of controversies related to environmental and social impacts of Bank-financed projects (see Human rights and Environment section below), with the Sardar Sarovar dam project in India – which sparked a global opposition campaign – leading to the establishment of the Bank’s Inspection Panel (its independent accountability mechanism [IAM]) in 1993 (see Observer Autumn 2017). A separate IAM for the International Finance Corporation (IFC) – the private sector arm of the World Bank – the Compliance Advisor Ombudsman (CAO), was created in 1999. These accountability mechanisms were set up to hear complaints of people and communities affected by Bank and IFC-funded projects, and to foster redress where relevant. While the Bank’s IAMs are generally considered to be ‘best of class’ among IFIs, their mandates are limited, their remedy mechanisms for those negatively impacted by Bank projects continue to lack, and management responses to their findings are often inadequate.

Human rights

A second stream of longstanding critiques has focused on the content of the policies, programmes and projects that the BWIs promote and enforce and how they have undermined a broad spectrum of human rights, with the Bank even being labelled a “human rights-free zone” in 2015 by the UN Special Rapporteur on extreme poverty and human rights.

2).

Dark pools of liquidity are private stock exchanges designed for trading large blocks of securities away from the public eye. These trading venues are called "dark" because of their complete lack of transparency, which benefits the big players but may leave the retail investor at a disadvantage.

Large investors prefer dark pools over public stock exchanges like the New York Stock Exchange or NASDAQ because they can discreetly buy or sell huge numbers of shares—in the hundreds of thousands or even millions—without worrying about moving the market price of the stock simply by expressing intention. But dark pools have grown so much over the years that experts are now worried that the stock market is no longer able to accurately reflect the price of securities. While estimates vary, dark pools are estimated to account for 15 percent of U.S. and 6 percent of European trading volume. Here are some of the pros and cons of dark pools.

3)

Currency appreciation refers to the increase in the value of one currency against another.

For instance, when the EUR/USD exchange rate moves from 1.10 to 1.15, it means that the euro has appreciated by $0.05 against the US dollar. One euro now costs $1.15 instead of $1.10.

There are numerous reasons why a currency appreciates. Monetary and fiscal policy, interest rates, inflation, the trade balance, other countries’ economic strength, tourism figures, political stability and many other macroeconomic conditions all contribute to exchange rate fluctuations and the appreciation of a currency relative to other currencies.

Currency appreciation, like currency depreciation, has immediate consequences for international trade and therefore for businesses operating with foreign currencies.

Currency appreciation means lower returns for export companies with foreign currency exposure, while for importers, it represents lower costs. On the contrary, currency depreciation allows exporters to lower prices and make their products more competitive and it is observed as a disadvantage for importers because it increases their costs.