The World Finance Crisis&the American Mission - The New York Review of Books »
Posted By deathray 6 months ago in Business & Finance
Wolf's main argument is that the microeconomics of finance is intimately intertwined with the nature of the global macroeconomy. If the latter is not sound, the former will not be sound either. His eight chapters take us through a detailed account of the role of exchange rate regimes—i.e., policies used to maintain currencies at a desired level against the dollar—and their influence on balance of payments and, ultimately, on the availability and use of credit in domestic economies.
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deathray
Hm...summarizing a life...Investment banker, sailor, unintentional gourmet cook. Ex US Naval officer, also Foreign Service. Split my time between NYC and Miami Beach ...
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deathray6 months ago
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i generally agree with prof. wolf's change of heart on the issue.
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fta:
By common consent, we have been living through the greatest economic downturn since World War II. It originated, as we all know, in a collapse of the banking system, and the first attempts to understand the resulting economic crisis focused on the reasons for bank failures. The banks, it was said, had failed to "manage" the new "risks" posed by financial innovation. Alan Greenspan's statement that the cause of the crisis was the "underpricing of risk worldwide" was the most succinct expression of this view.[1] Particular attention was paid to the role of the American subprime mortgage market as the source of the so-called "toxic" assets that had come to dominate bank balance sheets. Early remedies for the crisis concentrated on bailing out or refinancing the banks, so that they could start lending again. These were followed by "stimulus packages," both monetary and fiscal, to revive the real economy.-
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deathray6 months ago
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Wolf's most recent book, Fixing Global Finance, marks a turning point in his worldview. Written in 2007, just before the first signs of the current financial crisis were starting to register, it explains how unprecedented macroeconomic imbalances have repeatedly created the preconditions for financial crises over the last three decades. It offers the reader a chance to test Wolf's predictions and prescriptions a few months after they were made.
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Wolf's main argument is that the microeconomics of finance is intimately intertwined with the nature of the global macroeconomy. If the latter is not sound, the former will not be sound either. His eight chapters take us through a detailed account of the role of exchange rate regimes—i.e., policies used to maintain currencies at a desired level against the dollar—and their influence on balance of payments and, ultimately, on the availability and use of credit in domestic economies.
It was the large macroeconomic effects of financial crises in emerging markets in the 1990s that enabled America to become what Wolf calls the "borrower and spender of last resort." -
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beavith16 months ago
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good article. it seems lately that no one will talk aboutthe 800 pound gorilla in the room.
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take it for what its worth. i only hold an MBA from a thrid rate university, but i can quibble with some of his points.
he talks about 'underpricing risk.' i think it should be 'mispricing risk' and that's based on teh packaging of CDO and CDS debt tranches.
american subprime debt may have been the fuse that caused the explosion, but vast chinese savings was going to be invested somewhere. it could have been like excess japanese cash in the 1980s that was sunk into actual real estate. the CDO and CDSs generated could theoretically absorb any amount of cash as an investment and provide excellent return.
in an absolutely unregulated environment, with vast gouts of cash flowing in, it was a question of time.
20/20 hindsight is great!
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deathray6 months ago
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also fta:
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The second explanation sees cheap money in the US as a response to a "global saving glut" originating in East Asia and the Middle East. The "exorbitant privilege" enjoyed by the US dollar as the world's key currency allowed the US to pursue a fiscal and monetary policy that pushed domestic demand for goods and services well beyond domestic output, thereby absorbing the foreign savings hurled at it. The trouble was that foreign, and particularly Chinese, "investment" in the US economy, which in recent years has taken the form of buying US Treasury bonds, failed to create a corresponding flow of American tradable goods and services with which to repay the borrowing. As a result, America's domestic and foreign debt just went on increasing. In the technical jargon, both the US current account deficit and its debt-financed housing boom were unsustainable: it was unclear whether the dollar or the housing bubble would collapse first.-
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beavith16 months ago
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yes. as a response to the gloabla savings glut,well, yeah. people will go where the money is, to sellthem products, whether real or financial.
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that's not so hard to figure.
as far as generating US tradable goods, the US Treasury bonds ARE the tradable goods. the chinese are buying 'safe' investment with solid returns. US bonds serve as a savings account.
as long as the cash on hand is invested in the US economy and the US economy grows to pay back that invrestment with a greater return, this is not unsustainable. its not bad.
the train wreck occurs when the investment return plunges.
and here we are.
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deathray6 months ago
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fta:
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Concern about the US current account deficit—the excess of expenditures over receipts in a country's balance of payments—long preceded the financial crisis. By 2005, it had already ballooned to 5 percent of GDP. How had this happened? The conservative explanation was that the US monetary and fiscal authorities had provided Americans with the money to make payments to foreigners for imports far in excess of the payments they received from foreigners for exports. This "spending beyond your means" is the classic road to ruin, for households as well as for countries. In the case of households, it is normally brought to an end by a notice from your bank or credit card company saying that you have reached your credit limit or your account has been frozen. In the case of countries, it is normally ended by the refusal of other countries to lend the profligate country the means to continue its spending spree. The puzzle, though, was why the countries with surpluses continued to pour their hard-earned savings into the debt-ridden American economy.
In a notable lecture in 2005, Ben Bernanke, about to become chairman of the Federal Reserve, gave the answer. At first, he said, it was because the US was a highly productive economy. But following the financial crisis of 1997–1998, East Asian countries had deliberately started accumulating foreign exchange reserves to guard against another flight of capital similar to what they had just suffered or observed. To accumulate reserves they had to run current account surpluses, by earning more in exports than they spent on imports. This tied in with their policy of undervaluing their currencies against the dollar in order to maintain export-led growth.-
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beavith16 months ago
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i wish i could provide a quick link. maybe i'll get back to it if i get time later.
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an interesting article from last yea,r i think, called 'Chimerica' in the WSJ.
startling in its simplicity. the US and Chinese economies are integrated. we are a married couple. China, (he) works his ass off. US (her) spends her ass off. that's not what the article says. its a bit drier. that'd be my metaphor.
the benefits and risks of this relationship flow both ways.
we can have our current account balance and china can have her current account balance, but hte real current account balance is what is in excess or deficit from both.
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deathray6 months ago
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fta:
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As late as mid-2007, he thought that the possibility that "huge calamities" could be generated by world financial markets "looks remote."[3]
His message just two months later was very different:
Nothing that has happened has been a product of Fed folly alone. Its monetary policy may have been loose too long. The regulators may also have been asleep. But neither point is the heart of the matter.... Today's credit crisis...is also a symptom of an unbalanced world economy.[4]
Wolf more recently argued that the accumulation of dollar reserves by China and other East Asian countries that have maintained undervalued exchange rates against the dollar explains the low long-term interest rates and monetary easing of the US in the 2000s. Cheap money, he writes, had "encouraged an orgy of financial innovation, borrowing and spending" that created housing bubbles:
High-income countries with elastic credit systems and households willing to take on rising debt levels offset the massive surplus savings in the rest of the world. The lax monetary policies facilitated this excess spending, while the housing bubble was the vehicle through which it worked.[5]-
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beavith16 months ago
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and last but not least, the regulators may have been asleep.
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i disagree. the regulators for these new investment vehicles did not exist. the SEC or Fed or Congressional oversight panels may not have been swift enough or politically astute enough to see what was happening.
in my black conservative heart, i suspect that Barney Frank (i'm not sure if proposed regulation came up in the house. i'm just going on his shilling for Fanny and Freddie) and Chris Dodd, in the Senate, blocked intervention by John Sununu in 2004 and then again in 2005
forget micro and macro, the smoking gun may simply be political.
thanks for the post. this is some good debatable stuff.
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Progressive6 months ago
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We can debate the cause and continue attempting to shift the blame to suit our political ideologies, or we can determine how to create balance in globalization.
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FTA:
A willingness by the US government to end macroeconomic imbalances thus depends on its willingness to accept a much more plural world—one in which other centers of power in Europe, China, Japan, Latin America, and the Middle East assume responsibility for their own security, and in which the rules of the game for a world order that can preserve the peace while effectively tackling the challenges posed by terrorism, climate change, and abuse of human rights are negotiated and not imposed. Whether, even under Obama, the US is willing to accept such a political rebalancing of the world is far from obvious. It will require a huge mental realignment in the United States. The financial crash has disclosed the need for an economic realignment. But it will not happen until the US renounces its imperial mission.-
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beavith16 months ago
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i tried to stay apolitical. the economics speak for themselves.
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this is (or was) a complicated system that could have continued -had we a mechanism that was above the politics.
the good professor may have stood on solid economic theory with his assessment, but his political colors become apparent when he accuses the US of being the only one that mattered in this trouble.
we are already economically shackled to china. that's the reality.
and he goes on to blame us for being an empire (we aren't) and that we should integrate into the world, with all the political baggage that would be necessary for us to do so.
the current economic problem is not a reason for us to abrogate our constitution.
what's funny is the left of center and left are the ones that complain most about globalization and we live in a global economy. protectionism and trade war are acceptable options to them. uhhh. no. it isn't.
there is a certain reality disconnect there.
i get it. Obama won. the political reality has shifted. the question, now, is does that political reality somehow intersect the economic reality . Krugman would tell you yes. in the conclusion, Wolf is saying the same thing.
i find both simply alarming.
burning down the village to save it, is not a good idea.
i've got an idea. how about we fix the CDO and CDS liability issue? first? we'd have solvent banks. liquidity problems, as an issue, go away. at least make an effort to fix it. this tinkering around the edges and using the economic issues as a political entre to 'fix' everything else is disingenuous.
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flyonthewallzz6 months ago
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"Investing their dollars in US securities was a way of segregating their dollar purchases from the domestic money supply, thereby preventing domestic price increases that would have eroded their export competitiveness."
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I have read that more than 20% of China's GDP is invested in this country. I believe they have been quite careful not to bring a bulk of their earnings from the trade imbalance home because it would inflate the value of their currency and dull their competitive edge.
I think they are stuck in bed with us, and if the called in all their markers they would have to charge more for their product.
The folks talking here are way smarter than I about this kind of stuff, but here is what I think (or wonder about?).
I think Bretton-Woods Crashed in 1971 because we where giving up to much gold to finance the war in Vietnam. I think the American tax-payer became the "Gold Standard" that backs up our currency.
With no real facts to support my opinion I think that pegging this melt-down solely to a housing bubble is simplistic. I have no Idea about the proportions of bad loans as compared to fancy investment instruments that bet on them, but I suspect that raw dollar amount of Credit default Swaps, eclipses collateralized dept obligations. (maybe someone can give me an idea of the proportions?)-
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flyonthewallzz6 months ago
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I wonder why we chose to finance the war with borrowed money.
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I think that the war did effect oil prices.
I think oil prices created an out of balance inflation rate, which the fed reacted to by lowering interest rates. I think the changes in the tax structures that encouraged investment, reduced the supply of solid investments. the mortgage market became the most attractive place to meet the demands of investors, when supply of other types of investments was reduced.
The money from China's trade imbalance also reduced the supply of solid investments.
I think the almost quadrupling of oil costs made it a lot more difficult for folks to service their dept. Sure there where folks dancing on the edge, but I think a bunch of responsible folks have been taken out because they had no way to anticipate the rapid increase in their outlays.
Our dept became an asset for folks who had money to invest, but the price of basic stuff inflated much faster than the wages of the folks that took on that dept.
And to top it off the folks that where "investing" where doing a bunch of it with leveraged money.
I think that changes in the tax structure encouraged people to put their money at risk, I do not understand why short term capitol gains are not taxed the same way as gambling.
The huge increase in the amount of currency we have been printing is a close match to the increase in corporate receipts, the AGI of folks earning less than $1 million a year has been pretty flat.
The intent of the "market" is to define the "value" of real stuff.
I think we have drifted from reality. -
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flyonthewallzz6 months ago
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"The lack of opportunities for profitable investment determined the pattern of American spending. Americans borrowed not to invest in new machines but to speculate in houses and mergers and acquisitions. The resulting growth in paper wealth triggered a consumption boom. The situation was unsustainable because no new resources were being created with which to pay back either domestic or foreign borrowing."
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Real tangible property appears to be a very small share of the things folks call "Assets".
I read a great "Vanity Fair" article about the crash in Iceland.
The author described how a cat and dog owner would sell their pets to each other for $500 each which would increase the value of their held assets which they could use as collateral to borrow more money to buy more stock.
I am a bit conflicted..because it appears that the leverage used began with fishermen who could use trade and use their fishing quotas as leverage to buy stock. The change in the tax structure made it crazy for them not to do so. So the Boom in Iceland began with fishermen who had previously over fished and a "Cap and Trade" system was set up to protect the resource.
With the new tax structure and privatized banks the fishermen hired Russians to fish for them.
But they could not figure out why they would not fish during a raging storm, and considered them wimps.
The author went into a good bit of detail about Icelandic men and how nuts they are.
Alcoa took advantage of the cheap energy there and the low corporate tax rates. But they had some problems..
It seems that the workforce would gladly try to fix machinery that they had no idea how to fix and took risks that often got them injured. They also had to pay a bunch of money and loose a bunch of time to make sure there where no elf's (little people) living on the site they intended to build the plant on.
The Prime Minister of Iceland now is the only openly Lesbian head of State. And the three major privatized banks are now run by women.
The Celtic Tiger is another good boom and bust story.
WE had our bubble Iceland and Ireland did as well, and real estate prices skyrocketed.
But that is where the similarities end.
It appears to me that the common thread in the bust was giving global corporate interests their head to do as they wished. And their savings where not really that significant after all.
Alcoa has been dragging the DOW down for a while and the only reason we have not noticed is because of the other dogs on it.
I think the tech companies that set up in Ireland have taken a hit as well, but they where Dot Com survivors and amongst the few industries that actually had a new product to bring to market so their losses are hidden.
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flyonthewallzz6 months ago
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Well CRYMTYPHON:
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You have touched a sore spot...when I was a kid I got my ass kicked a lot.
My MoM immigrated from England and I spent a good bit of my childhood in European schools.
When I hit Jr. High school in the Midwest... I talked funny, and therefore got my ass kicked a bunch.
My litte brother and I rejected the ineffectual life our parents lived, and work in the trades.
It was kind of funny how just a little bit of hard work turned us into big dudes.
We both split when we where kids, and the only place to strike out from where bad neighborhoods.
It has been a long time since I have had my ass kicked, and I have not had to do any ass kicking.
But I have smelt fear from folks that tried to get in my space and take stuff from me, and did not understand why I got in even closer.
I have seen folks that look like the kids that used to kick my ass, running red lights to get out of my neighborhood.
It sucks that I live in a place that I have to lock my front door, but all my kids friends have keys to my house. Now they only use them when the kids are home from college, I kind of miss coming home to a bunch of kids that have raided the refrigerator and cooked up something to eat for dinner. Our house is a mess but it is a comfortable place.
My son and daughter got accepted to a fancy magnet school, one of those high achievers type places. Well my son did not do so well there so he moved to "High Tech High" and lost a year.
The school had a hard core Robotics program that my son was into.
The whole time I had my nose to the grindstone and was so wrapped up in working I missed the best part of being a Dad. I did not realize the value of what my wife taught our kids. She was brought up in an admittedly racist catholic immigrant family. But somehow had blown past it with an honesty that belittles my wasp heritage.
My son was one of 6 white kids at his school, Like I said I was busy making a buck, and I trusted my wife's judgment.
She did good.
My son did not get his ass kicked at school because he was from SW Philly and folks reserved the ass Kicking for kids from the burbs.
My son is not to far from a degree in engineering.
I have bumped heads with engineers frequently.
The time flew by way to quickly and I regret not being more involved in my kids lives, being a "cool" dad rings a bit hollow. -
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dxxy4u6 months ago
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This whole Financial thing is (b)ullshit. Did you see what AIG done with their common shares after their Annual Shareholders' meeting? Now AIG were selling for pennies, wanting to cash in on this, many Investors bought these shares. Rather than reaping the reward, they got (s)crewed right in the (a)ss with a 1-for-20 REVERSE STOCK SPLIT. Then that plunged. I went from having a surplus to a loss at the stroke of a pen. Now this is (B)ULLSHIT. If you have Fannie Mae(FNM) and Freddie Mac (FRM), dump them (b)astards now, because they are going to pull the same (b)ullshit when they get things straighten out. You are not going to see your penny shares worth dollars later on. You are not going to reap a Bonanza. The (B)astards are going to make sure you don't.
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Icantwait6 months ago
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My Fellow Americans: Although there is a great deal of truth in much of what has been dissected, there is also some personal observations that are basically speculation. Some Facts are facts, but some of these facts are appearances of what are believed to be facts. We all know that a Country can not spend more than it is bringing in or neither can a person for that matter.
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Tried and true productive techniques can not be dismissed and then be replaced with policies that have not historically worked in the past. Situations that drain the pocketbook have to be eliminated. Everyone must provide a concerted effort to participate in the elimination of the debt.
The tax burden on productive individuals is counter productive because they are placing these funds into the hands of individuals that have created the problems in the first place. A re-evaluation of people using the system as a ETM machine must be placed under more scrutiny and if they are abusing the system then they must be cut off. Individuals that have come to this country illegally must be hunted down and exiled, if they return they must be imprisoned and put to work to enhance the environment. The more bad apples that are weeded out the more revenue that will be put into the coffer. Criminals that drain tax payer dollars must be more severely punished. Murderers must be terminated, (death penalty), Rapist, and such neutralized, robbers must lose some limbs, less severe criminals, jail time according to the crime. All money going into the coffer. We need decent responsible citizens like we used to have and that we were able to feel safe and comfortable around.
I thought we were in the reward good behavior and punish bad behavior generation. We don't need Politicians we need State Representatives of the People. Time to Clean out the House and the Senate. The Real American -
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Radiofreeeuropa6 months ago
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Fly, sociologically I think there is still residual "Dad's purpose is to bring home the bacon" syndrome driven into our psyche, I learned that even though I, like you, felt the need to focus largely on acquiring pork product through those early years, as my kids became reasoning individuals...adults...these are wonderful years with them, perhaps the best. Anyway this has been a great thread with some excellent comments from all.
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I however am of the opinion that the problem remains Greed. The failure of government (and it is indeed both parties) is that they trust the very people who created and sold these completely warped concepts about economic success to guide their paths. You see politicians don't really understand this stuff, they rely on Wall St, and the people involved in the rather bizarre investment banking industry to tell them what to do. And they do it. I think every detail mentioned on the thread is a factor, but let's face it -wolves were hired to guard the chicken coop, and as we watched the chickens disappear we (well you might remember I and and a hand full of others have been questioning the entire "basis" of the economy for about a decade) accepted whatever the wolves wanted and made it policy. The regulators? They are pretty much canines...The politicos? Clueless. Most of what went awry is attributable to an abandonment of simple common sense. It was as if a theoretical physicist drew up a LONG equation that went on and on, eventually showing 2 plus 2 did not equal 4...no one wanted to appear dim so they accepted the equation. Problem is the equation was dead wrong in this universe, and most everyone knew it was wrong...Emperor's New Clothes De Jevu . -
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Radiofreeeuropa6 months ago
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"We don't have to burn down the village to save it, but we may have to dismantle and reconstruct much of it in order to maintain its functionality."
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Yes agreed, the foundation is likely solid, but hurricane straps must be installed and the termite infested posts must be replaced.
Though global a global economy is inevitable, unless there is an even playing field, there will be no fair trade. So a degree of each country's self preservation manifests itself in what some may call protectionism. Until a Chinese worker is paid the same as a Canadian or French worker and the laws that protect the environment and the laborers are the same, there will be protectionism or there will be collapse. So in a sense those who say a global economy is necessary are also saying a one world government is necessary. I don't think we have reached the point in our evolution where that is acceptable...-
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beavith16 months ago
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the concept of an even playing field is simple and wrong. as long as areas have high labor availability, labor pricing there will always be worth less than a labor constrained area.
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short of a major epidemic that kills everyone but 40 million in China, wage parity between canada and china will never happen.
labor value disparity doesn't demand protectionism. politicians demand protectionism to protect favored industries.
this is basic economics. you're a smart person. read up....
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