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Joined: 28 Dec 2005 Posts: 12651
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Posted: Sun Jan 18, 2009 12:33 am Post subject: Root Cause of the Financial Crisis |
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January 13th, 2009
Global imbalances and the Triffin dilemma
EXTERNAL IMBALANCES
Leading economists agree that global imbalances lie at the root of the current crisis. But opinions are more sharply divided on their origins, which countries are to blame, and what should be done to resolve them.
The Fed’s critics argue that cheap money policies in the late 1990s and early 2000s are mainly responsible for fueling a debt-driven consumer boom, and sucking in record volumes of imports, many from the newly industrializing economies of Asia. Funding all this required issuing huge volumes of debt, much of it securitized against dubious mortgages and consumer debts, and sold to foreigners when domestic savings proved inadequate.
In contrast, Fed Chairman Ben Bernanke and some leading commentators blame China. In their view, China’s reliance on export-led growth, refusal to allow the yuan to appreciate, accumulation of foreign reserves, and recycling of surplus foreign exchange back into the market for U.S. government bonds and mortgage-backed securities created a “global savings glut”. This glut artificially reduced global interest rates and created the perverse incentives for an unsustainable build up of debt in the United States.
Differing interpretations about the origin of the imbalances lead to the two sides to proffer different solutions. Fed critics argue the solution lies in a long-term tightening of U.S. credit conditions and higher domestic savings. Bernanke and his supporters argue the solution is for China to stimulate domestic demand, appreciate the yuan and reduce reserve accumulation.
In reality, it takes both a lender and a borrower to create a debt crisis; the solution to the crisis lies in balanced adjustments on both sides.
http://blogs.reuters.com/great-debate/2009/01/13/global-imbalances-and-the-triffin-dilemma/
My comment:
The "Fed's critics" hypothesis makes no sense and their solution would have resulted in a suboptimal U.S. position. I stated many times before, the U.S. captured the greatest gains of trade by taking full advantage of poor export-led economic policies. The U.S. responded appropriately to gain the most or lose the least in the global economy.
In the 2000s, export-led economies overproduced, e.g. paying low wages, selling their goods too cheaply, and lending their dollars for big losses (10% negative annual returns, given negative real interest rates, opportunity costs, e.g. not exchanging their goods for U.S. consumer goods and U.S. capital goods to a lesser extent, and currency exchange rates), while the U.S. underproduced. It was appropriate the U.S. eased the money supply to raise actual output towards potential output, which caused export-led economies to overproduce even more. However, U.S. fiscal policy needs to work better with U.S. monetary policy. |
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