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Posted by: deathray 5 months, 3 weeks ago
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deathray5 months, 3 weeks 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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deathray5 months, 3 weeks 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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beavith15 months, 3 weeks ago
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yeah. maybe. i'm not so sure.
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micro and macro are intertwined, undoubtedly. that interaction /overlap is the moving target.
what makes me unsure that its a micro problem based on currency flows is George Soros. he tanked the Thai baht because he saw an opportunity to make a ton of money. that rippled through the world economy and damaged the south koreans, the taiwanese, the russians the mexicans and others.
imagine you are the chinese. your $ income is way up and you can't build factories fast enough, and the cost of building those factories are dropping. you've been actively reducing poverty and increasing wealth. are you going to let the yuan float? or make the renmimbi interchangeable with the yuan? and with value accumulation, let the value of the currency climb and price you out of further growth?
heck no.
you and the americans are going to become economic partners. the US economy was th eonly one big enough and savvy enough to come up with investment vehicles that could handle the cash.
china was exporting deflation. we were exporting inflation.-
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deathray5 months, 3 weeks ago
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this is my perspective (and i'm currently reading prof. wolf's book):
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the issue isn't about trades made in the forex markets for him (although they may be related to currency imbalances); it's more about the issues of production and consumption. if the chinese, for example, are doing all the producing, and the us economy is doing all the consuming, the currency flows to china. chinese purchases of us debt keep the dollar relatively stable, so the us can keep buying chinese stuff.
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beavith15 months, 3 weeks 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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deathray5 months, 3 weeks ago
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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. >
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that's true...but he's mostly talking about issues outside the financial markets...except for issues of capital flight, he's looking at trade imbalances.-
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GWHayduke5 months, 3 weeks ago
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One interesting thing about trade imbalances is how they are sometimes measured.
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Often, 'services' are discounted because they dont meet the criteria of durable goods, products or tangible assets that can be easily measured.
We are not deficient in the services we provide abroad.
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