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On August 24 2013 17:18 WhiteDog wrote:Show nested quote +On August 24 2013 04:35 JonnyBNoHo wrote:On August 24 2013 03:57 farvacola wrote:On August 24 2013 03:53 JonnyBNoHo wrote:On August 24 2013 03:16 WhiteDog wrote:On August 24 2013 01:32 JonnyBNoHo wrote:On August 23 2013 21:45 WhiteDog wrote:
I always thought one of the few (good) things the US had that most countries had not was accountability...
The memo is really important because it is a physical proof that some people, like Greenspawn, did irresponsable things because of their stupid ideology. And considering the economic difficulties the entire world suffered because of that ideology, their responsability should be discussed.
That doesn't mean they should be in prison, but they for sure shouldn't be at the head of the Federal Reserve or any international organization.
It is also really problematic that some high officials, who arguably lead the evolutions of the world economic policies, are so deeply linked with banks and financial institutions. Even the most free marketists economists considered that the banks are a problem for a "free" economy (Hayek anyone ?). Yeah, people should be held accountable but I don't see anything in the memo that's a problem. It's just reaffirming what the public already knew - international trade in financial services was liberalized a few years ago. Going a bit deeper, I know that liberalizing trade in financial services lead to a few governments and orgaizations in Euorpe to make bad decisions regarding derivatives, but that seems more like a governance in Europe problem than a banking or trade problem (seems small potatoes to the overall European debt crisis too). The heart of the crisis in the US was a bank run in the repo market. I don't know Europe as well, but the main issue seems to be that pre-crisis, all sovereign debt in the Eurozone was being treated the same. Neither of those core issues (or the main issues surrounding them) have anything to do with the memo or the article about it. It is specifically written that one of the few people responsible for this "liberalization of markets (Larry Summers), which we know now was responsible for the crisis (because based on ideologies and irrealist models), was Obama's preferred choice for Chairman of the federal reserve... If you think the liberalisation and the deregulation has nothing to do with the crisis, then you are mistaking yourself. Greenspawn himself insisted on the fact that most models used by economists at the time refuted the simple idea of a crisis. I don't really have the time to argue, but it's not only a problem of risk management. Liberalization contributed, sure, but only at the margins. It was more of an accelerator than a core, fundamental issue. What makes you think this? I've read quite a bit on the crisis. The fundamental trigger was a bank run in the repo market. That run had many causes itself, most notably the mortgage credit bubble. Now that bubble itself has an assortment of causes. You can insert liberalization here as one of those. In addition you have to factor in central bank policy, the asian financial crisis (and subsequent bailout, and subsequent buildup of foreign reserves), fannie mae / freddie mac and other government policies. Now, had we not gone down the road of financial liberalization we can't say for certain how things would have turned out different. Plausibly, we would have either avoided a complete run and more likely the run / crisis would have been less severe. But! there would be a tradeoff - you'd lose the benefits of the liberalization (and they do exist). A plausible way out is to address the run itself - we stop bank runs at the retail level with deposit guarantees. Some regulation / restriction that addresses runs at the wholesale level (the repo market) could be used to address the last run. Additionally, regulations could mandate that banks 'hold' more equity which would address the poor incentives banks currently have to take excessive risk (bankers would hate this btw). What have you read ? Seems to me you read article written during the crisis (2007 - 2008). Since 2010, most work I've read on the crisis talk on the rôle of countries such as China, the global "saving glut" theory, the problem of systemic risks with new institutions like the hedge funds and the most recent work from the IMF even discuss the impact of inequalities on the crisis. ( source) Suffice to say, you are only describing the most obvious mechanisms when you point out the "financial" (as in financial innovations and market models) aspect of the crisis, but this aspect has to be put back into a more global frame to really describe what happened. About the benefit of liberalisation... they're a fraud most of the time. I am talking about the financial market, the deregulation of finance and the capital mobility it gives. I'm not talking about import and export of goods.
I referenced the global savings glut when I wrote "and subsequent buildup of foreign reserves".
I'm not sure what new systemic risks from hedge funds you are referencing (hedge funds are a broad category that overlaps with other financial players). As for inequality, that's a very controversial (i.e. unproven) factor. I'd rather avoid discussing the more speculative aspects, as that'll just lead to a typical ideological debate.
As for financial liberalization, a poor country isn't very capable of building modern factories and infrastructure without outside financing. So without that, their ability to export real goods and services will be hobbled.
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On August 25 2013 00:35 JonnyBNoHo wrote:Show nested quote +On August 24 2013 17:18 WhiteDog wrote:On August 24 2013 04:35 JonnyBNoHo wrote:On August 24 2013 03:57 farvacola wrote:On August 24 2013 03:53 JonnyBNoHo wrote:On August 24 2013 03:16 WhiteDog wrote:On August 24 2013 01:32 JonnyBNoHo wrote:On August 23 2013 21:45 WhiteDog wrote:
I always thought one of the few (good) things the US had that most countries had not was accountability...
The memo is really important because it is a physical proof that some people, like Greenspawn, did irresponsable things because of their stupid ideology. And considering the economic difficulties the entire world suffered because of that ideology, their responsability should be discussed.
That doesn't mean they should be in prison, but they for sure shouldn't be at the head of the Federal Reserve or any international organization.
It is also really problematic that some high officials, who arguably lead the evolutions of the world economic policies, are so deeply linked with banks and financial institutions. Even the most free marketists economists considered that the banks are a problem for a "free" economy (Hayek anyone ?). Yeah, people should be held accountable but I don't see anything in the memo that's a problem. It's just reaffirming what the public already knew - international trade in financial services was liberalized a few years ago. Going a bit deeper, I know that liberalizing trade in financial services lead to a few governments and orgaizations in Euorpe to make bad decisions regarding derivatives, but that seems more like a governance in Europe problem than a banking or trade problem (seems small potatoes to the overall European debt crisis too). The heart of the crisis in the US was a bank run in the repo market. I don't know Europe as well, but the main issue seems to be that pre-crisis, all sovereign debt in the Eurozone was being treated the same. Neither of those core issues (or the main issues surrounding them) have anything to do with the memo or the article about it. It is specifically written that one of the few people responsible for this "liberalization of markets (Larry Summers), which we know now was responsible for the crisis (because based on ideologies and irrealist models), was Obama's preferred choice for Chairman of the federal reserve... If you think the liberalisation and the deregulation has nothing to do with the crisis, then you are mistaking yourself. Greenspawn himself insisted on the fact that most models used by economists at the time refuted the simple idea of a crisis. I don't really have the time to argue, but it's not only a problem of risk management. Liberalization contributed, sure, but only at the margins. It was more of an accelerator than a core, fundamental issue. What makes you think this? I've read quite a bit on the crisis. The fundamental trigger was a bank run in the repo market. That run had many causes itself, most notably the mortgage credit bubble. Now that bubble itself has an assortment of causes. You can insert liberalization here as one of those. In addition you have to factor in central bank policy, the asian financial crisis (and subsequent bailout, and subsequent buildup of foreign reserves), fannie mae / freddie mac and other government policies. Now, had we not gone down the road of financial liberalization we can't say for certain how things would have turned out different. Plausibly, we would have either avoided a complete run and more likely the run / crisis would have been less severe. But! there would be a tradeoff - you'd lose the benefits of the liberalization (and they do exist). A plausible way out is to address the run itself - we stop bank runs at the retail level with deposit guarantees. Some regulation / restriction that addresses runs at the wholesale level (the repo market) could be used to address the last run. Additionally, regulations could mandate that banks 'hold' more equity which would address the poor incentives banks currently have to take excessive risk (bankers would hate this btw). What have you read ? Seems to me you read article written during the crisis (2007 - 2008). Since 2010, most work I've read on the crisis talk on the rôle of countries such as China, the global "saving glut" theory, the problem of systemic risks with new institutions like the hedge funds and the most recent work from the IMF even discuss the impact of inequalities on the crisis. ( source) Suffice to say, you are only describing the most obvious mechanisms when you point out the "financial" (as in financial innovations and market models) aspect of the crisis, but this aspect has to be put back into a more global frame to really describe what happened. About the benefit of liberalisation... they're a fraud most of the time. I am talking about the financial market, the deregulation of finance and the capital mobility it gives. I'm not talking about import and export of goods. I referenced the global savings glut when I wrote "and subsequent buildup of foreign reserves".
The thing is, talking about global savings glut lead you to talk on ressource allocation and capital flux on the entire globe - which leads you into talking about market efficiency, inequalities in the development of financial sector all over the world, average saving rate in some countries, etc. It's not a question of ideology (we are talking about the IMF, not Krugman).
I'm not sure what new systemic risks from hedge funds you are referencing (hedge funds are a broad category that overlaps with other financial players). As for inequality, that's a very controversial (i.e. unproven) factor. I'd rather avoid discussing the more speculative aspects, as that'll just lead to a typical ideological debate.
Inequalities are not an unproven factor but whatever, it's not the subject here. About hedge funds, I could link you some work on that but the few I know are only in french (Aglietta worked on that for exemple).
As for financial liberalization, a poor country isn't very capable of building modern factories and infrastructure without outside financing. So without that, their ability to export real goods and services will be hobbled.
Yes but how did things happen in reality ? The savings of the entire planet flew to developped countries and specifically tje US (because there are always perspective for investment in the US), and didn't finance "modern factories and infrastructures" in under developped countries. The entire idea of liberalisation (of finance) is based on the idea that market are efficient in allocating ressources, which they are not.
This is not really the subject, but the fact is that when your economic policy is based on an ideology that refute any possibilities for crisis, that refute any possibilities for contagion, that consider that the market is efficient - meaning you cannot "win" against the market (which is true), but also that that the market always make the most "efficient" decision - then you are wrong and you should pay the price of the wrong decisions you've made. That's accountability.
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On August 25 2013 02:13 WhiteDog wrote:
you should pay the price of the wrong decisions you've made.
false. other people should pay the price. like US taxpayers and 3rd world peasants. just think, WhiteDog, if financiers had to pay the price for their mistakes, fewer people would be financiers, and then where would we be???
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On August 25 2013 02:24 sam!zdat wrote:Show nested quote +On August 25 2013 02:13 WhiteDog wrote:
you should pay the price of the wrong decisions you've made. false. other people should pay the price. like US taxpayers and 3rd world peasants.
Yeah that's reality, I'm talking about justice 
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Who cares about justice when we can have economical soundness or something ?
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On August 25 2013 02:13 WhiteDog wrote:Show nested quote +On August 25 2013 00:35 JonnyBNoHo wrote:On August 24 2013 17:18 WhiteDog wrote:On August 24 2013 04:35 JonnyBNoHo wrote:On August 24 2013 03:57 farvacola wrote:On August 24 2013 03:53 JonnyBNoHo wrote:On August 24 2013 03:16 WhiteDog wrote:On August 24 2013 01:32 JonnyBNoHo wrote:On August 23 2013 21:45 WhiteDog wrote:
I always thought one of the few (good) things the US had that most countries had not was accountability...
The memo is really important because it is a physical proof that some people, like Greenspawn, did irresponsable things because of their stupid ideology. And considering the economic difficulties the entire world suffered because of that ideology, their responsability should be discussed.
That doesn't mean they should be in prison, but they for sure shouldn't be at the head of the Federal Reserve or any international organization.
It is also really problematic that some high officials, who arguably lead the evolutions of the world economic policies, are so deeply linked with banks and financial institutions. Even the most free marketists economists considered that the banks are a problem for a "free" economy (Hayek anyone ?). Yeah, people should be held accountable but I don't see anything in the memo that's a problem. It's just reaffirming what the public already knew - international trade in financial services was liberalized a few years ago. Going a bit deeper, I know that liberalizing trade in financial services lead to a few governments and orgaizations in Euorpe to make bad decisions regarding derivatives, but that seems more like a governance in Europe problem than a banking or trade problem (seems small potatoes to the overall European debt crisis too). The heart of the crisis in the US was a bank run in the repo market. I don't know Europe as well, but the main issue seems to be that pre-crisis, all sovereign debt in the Eurozone was being treated the same. Neither of those core issues (or the main issues surrounding them) have anything to do with the memo or the article about it. It is specifically written that one of the few people responsible for this "liberalization of markets (Larry Summers), which we know now was responsible for the crisis (because based on ideologies and irrealist models), was Obama's preferred choice for Chairman of the federal reserve... If you think the liberalisation and the deregulation has nothing to do with the crisis, then you are mistaking yourself. Greenspawn himself insisted on the fact that most models used by economists at the time refuted the simple idea of a crisis. I don't really have the time to argue, but it's not only a problem of risk management. Liberalization contributed, sure, but only at the margins. It was more of an accelerator than a core, fundamental issue. What makes you think this? I've read quite a bit on the crisis. The fundamental trigger was a bank run in the repo market. That run had many causes itself, most notably the mortgage credit bubble. Now that bubble itself has an assortment of causes. You can insert liberalization here as one of those. In addition you have to factor in central bank policy, the asian financial crisis (and subsequent bailout, and subsequent buildup of foreign reserves), fannie mae / freddie mac and other government policies. Now, had we not gone down the road of financial liberalization we can't say for certain how things would have turned out different. Plausibly, we would have either avoided a complete run and more likely the run / crisis would have been less severe. But! there would be a tradeoff - you'd lose the benefits of the liberalization (and they do exist). A plausible way out is to address the run itself - we stop bank runs at the retail level with deposit guarantees. Some regulation / restriction that addresses runs at the wholesale level (the repo market) could be used to address the last run. Additionally, regulations could mandate that banks 'hold' more equity which would address the poor incentives banks currently have to take excessive risk (bankers would hate this btw). What have you read ? Seems to me you read article written during the crisis (2007 - 2008). Since 2010, most work I've read on the crisis talk on the rôle of countries such as China, the global "saving glut" theory, the problem of systemic risks with new institutions like the hedge funds and the most recent work from the IMF even discuss the impact of inequalities on the crisis. ( source) Suffice to say, you are only describing the most obvious mechanisms when you point out the "financial" (as in financial innovations and market models) aspect of the crisis, but this aspect has to be put back into a more global frame to really describe what happened. About the benefit of liberalisation... they're a fraud most of the time. I am talking about the financial market, the deregulation of finance and the capital mobility it gives. I'm not talking about import and export of goods. I referenced the global savings glut when I wrote "and subsequent buildup of foreign reserves". The thing is, talking about global savings glut lead you to talk on ressource allocation and capital flux on the entire globe - which leads you into talking about market efficiency, inequalities in the development of financial sector all over the world, average saving rate in some countries, etc. It's not a question of ideology (we are talking about the IMF, not Krugman).
Is that the IMF's official position? What you linked to was an interview with an economist who wrote in the book The Occupy Handbook.
You need to read up on the global savings glut. The global savings glut is not a product of the singular force of financial and trade liberalization. The OPEC cartel and the Chinese government's official policy to encourage savings played huge roles. As did Asian governments official policy of encouraging net exports.
Show nested quote +I'm not sure what new systemic risks from hedge funds you are referencing (hedge funds are a broad category that overlaps with other financial players). As for inequality, that's a very controversial (i.e. unproven) factor. I'd rather avoid discussing the more speculative aspects, as that'll just lead to a typical ideological debate. Inequalities are not an unproven factor but whatever, it's not the subject here.
As far as I know there is no consensus on that topic. Papers have been written that cite it as a cause, and papers have been written on it not being a cause.
Show nested quote +As for financial liberalization, a poor country isn't very capable of building modern factories and infrastructure without outside financing. So without that, their ability to export real goods and services will be hobbled. Yes but how did things happen in reality ? The savings of the entire planet flew to the US (because there are always perspective for investment in the US), and didn't finance "modern factories in infrastructure" in under developped countries. The entire idea of liberalisation (of finance) is based on the idea that market are efficient in allocating ressource, which they are not. This is not really the subject, but the fact is that when your economic policy is based on an ideology that refute any possibilities for crisis, that refute any possibilities for contagion, that consider that the market is efficient - meaning you cannot "win" against the market (which is true), but also that that the market always make the most "efficient" decision - then you are wrong and you should pay the price of the wrong decisions you've made. That's accountability.
FDI to poor countries is often used to increase their economic development. This is an indisputable fact. Markets are efficient. This is another indisputable fact. They are not perfect, no one believes that they are. And no country has an economic policy build around the idea that they are perfect.
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On August 25 2013 02:44 JonnyBNoHo wrote:
The global savings glut is not a product of the singular force of financial and trade liberalization. The OPEC cartel and the Chinese government's official policy to encourage savings played huge roles. As did Asian governments official policy of encouraging net exports.
quite right jonny. there is much more wrong with capitalism than singular force of financial and trade liberalization. well taken
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On August 25 2013 02:44 JonnyBNoHo wrote:Show nested quote +On August 25 2013 02:13 WhiteDog wrote:On August 25 2013 00:35 JonnyBNoHo wrote:On August 24 2013 17:18 WhiteDog wrote:On August 24 2013 04:35 JonnyBNoHo wrote:On August 24 2013 03:57 farvacola wrote:On August 24 2013 03:53 JonnyBNoHo wrote:On August 24 2013 03:16 WhiteDog wrote:On August 24 2013 01:32 JonnyBNoHo wrote:On August 23 2013 21:45 WhiteDog wrote:
I always thought one of the few (good) things the US had that most countries had not was accountability...
The memo is really important because it is a physical proof that some people, like Greenspawn, did irresponsable things because of their stupid ideology. And considering the economic difficulties the entire world suffered because of that ideology, their responsability should be discussed.
That doesn't mean they should be in prison, but they for sure shouldn't be at the head of the Federal Reserve or any international organization.
It is also really problematic that some high officials, who arguably lead the evolutions of the world economic policies, are so deeply linked with banks and financial institutions. Even the most free marketists economists considered that the banks are a problem for a "free" economy (Hayek anyone ?). Yeah, people should be held accountable but I don't see anything in the memo that's a problem. It's just reaffirming what the public already knew - international trade in financial services was liberalized a few years ago. Going a bit deeper, I know that liberalizing trade in financial services lead to a few governments and orgaizations in Euorpe to make bad decisions regarding derivatives, but that seems more like a governance in Europe problem than a banking or trade problem (seems small potatoes to the overall European debt crisis too). The heart of the crisis in the US was a bank run in the repo market. I don't know Europe as well, but the main issue seems to be that pre-crisis, all sovereign debt in the Eurozone was being treated the same. Neither of those core issues (or the main issues surrounding them) have anything to do with the memo or the article about it. It is specifically written that one of the few people responsible for this "liberalization of markets (Larry Summers), which we know now was responsible for the crisis (because based on ideologies and irrealist models), was Obama's preferred choice for Chairman of the federal reserve... If you think the liberalisation and the deregulation has nothing to do with the crisis, then you are mistaking yourself. Greenspawn himself insisted on the fact that most models used by economists at the time refuted the simple idea of a crisis. I don't really have the time to argue, but it's not only a problem of risk management. Liberalization contributed, sure, but only at the margins. It was more of an accelerator than a core, fundamental issue. What makes you think this? I've read quite a bit on the crisis. The fundamental trigger was a bank run in the repo market. That run had many causes itself, most notably the mortgage credit bubble. Now that bubble itself has an assortment of causes. You can insert liberalization here as one of those. In addition you have to factor in central bank policy, the asian financial crisis (and subsequent bailout, and subsequent buildup of foreign reserves), fannie mae / freddie mac and other government policies. Now, had we not gone down the road of financial liberalization we can't say for certain how things would have turned out different. Plausibly, we would have either avoided a complete run and more likely the run / crisis would have been less severe. But! there would be a tradeoff - you'd lose the benefits of the liberalization (and they do exist). A plausible way out is to address the run itself - we stop bank runs at the retail level with deposit guarantees. Some regulation / restriction that addresses runs at the wholesale level (the repo market) could be used to address the last run. Additionally, regulations could mandate that banks 'hold' more equity which would address the poor incentives banks currently have to take excessive risk (bankers would hate this btw). What have you read ? Seems to me you read article written during the crisis (2007 - 2008). Since 2010, most work I've read on the crisis talk on the rôle of countries such as China, the global "saving glut" theory, the problem of systemic risks with new institutions like the hedge funds and the most recent work from the IMF even discuss the impact of inequalities on the crisis. ( source) Suffice to say, you are only describing the most obvious mechanisms when you point out the "financial" (as in financial innovations and market models) aspect of the crisis, but this aspect has to be put back into a more global frame to really describe what happened. About the benefit of liberalisation... they're a fraud most of the time. I am talking about the financial market, the deregulation of finance and the capital mobility it gives. I'm not talking about import and export of goods. I referenced the global savings glut when I wrote "and subsequent buildup of foreign reserves". The thing is, talking about global savings glut lead you to talk on ressource allocation and capital flux on the entire globe - which leads you into talking about market efficiency, inequalities in the development of financial sector all over the world, average saving rate in some countries, etc. It's not a question of ideology (we are talking about the IMF, not Krugman). Is that the IMF's official position? What you linked to was an interview with an economist who wrote in the book The Occupy Handbook. You need to read up on the global savings glut. The global savings glut is not a product of the singular force of financial and trade liberalization. The OPEC cartel and the Chinese government's official policy to encourage savings played huge roles. As did Asian governments official policy of encouraging net exports. Show nested quote +I'm not sure what new systemic risks from hedge funds you are referencing (hedge funds are a broad category that overlaps with other financial players). As for inequality, that's a very controversial (i.e. unproven) factor. I'd rather avoid discussing the more speculative aspects, as that'll just lead to a typical ideological debate. Inequalities are not an unproven factor but whatever, it's not the subject here. As far as I know there is no consensus on that topic. Papers have been written that cite it as a cause, and papers have been written on it not being a cause. Show nested quote +As for financial liberalization, a poor country isn't very capable of building modern factories and infrastructure without outside financing. So without that, their ability to export real goods and services will be hobbled. Yes but how did things happen in reality ? The savings of the entire planet flew to the US (because there are always perspective for investment in the US), and didn't finance "modern factories in infrastructure" in under developped countries. The entire idea of liberalisation (of finance) is based on the idea that market are efficient in allocating ressource, which they are not. This is not really the subject, but the fact is that when your economic policy is based on an ideology that refute any possibilities for crisis, that refute any possibilities for contagion, that consider that the market is efficient - meaning you cannot "win" against the market (which is true), but also that that the market always make the most "efficient" decision - then you are wrong and you should pay the price of the wrong decisions you've made. That's accountability. FDI to poor countries is often used to increase their economic development. This is an indisputable fact. Markets are efficient. This is another indisputable fact. They are not perfect, no one believes that they are. And no country has an economic policy build around the idea that they are perfect.
No you don't understand my point about the global saving glut (well to be fair I didn't explained really well). I said it was a theory, It's something ben bernanke came with after the crisis, but there was no "global saving glut" in reality (too much saving for no investment opportunities), in reality what we saw was the inability of the international finance market to allocate the ressources - there are a lot of investment opportunities in the green market or in the under developed countries, with a high return rate. So why did it all go in those new "financial innovations" with high risks ?
The problem is not that the chinese had too much savings, it is that all the savings they had rushed to the US.
To show that I'm talking out of thin air, I'm giving an interview from Stiglitz :
That means what you call a savings glut. But now this is -- the final point I want to make, the issue is not a savings glut.
When you talk about savings glut, it's a balance of savings on the one hand and investment. And I'd rather call it an investment dearth and a shortage of investment, not of investment needs.
I look around the world and I say, look, a billion people in extreme poverty, more than that, a couple billion people in poverty. We need to invest, to enable their standard of living to go up.
The world faces a problem of global warming. We have to retrofit the whole global economy. That's going to take a lot of investment. We're talking about -- how are we going to change our, you know, investment in energy -- new energy systems, new transportation systems.
That's going to take a lot of investment. So we shouldn't be telling people, don't save. We should be figuring out how to take the savings and transform that into productive investment. And that comes back to the big failure in this crisis: the failure of the financial system to do its job.
Its job is to take savings and transform them into the place where they have the highest return. Putting savings into housing beyond people's ability to pay, in the richest country in the world, is not the globally most useful place to put the savings.
http://www.cfr.org/united-states/global-economic-trends-conversation-joseph-e-stiglitz/p21301
Also, the high saving rate in china is not only linked to China's encouragement toward savings, it is linked with the rather small banking system in china (no loan possible for most of the population for exemple) and the inexistance of "social security" in the broad sense, which force most chinese to save a lot of money "in case". This is one of the point that showed how liberalisation of the finantial market is a dumb thing to do : because at the scale of the planet, there are huge inequalities in the development of social security, health insurance, finance and banking sector, etc.
About the IMF stance on inequalities, it's the stance of Olivier Blanchard I think (not sure ?) I could find some reference if you want.
Markets are efficient. This is another indisputable fact.
Depend on what you mean by efficient. And I am only talking about international financial market, not all "markets".
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On August 25 2013 02:58 WhiteDog wrote:Show nested quote +On August 25 2013 02:44 JonnyBNoHo wrote:On August 25 2013 02:13 WhiteDog wrote:On August 25 2013 00:35 JonnyBNoHo wrote:On August 24 2013 17:18 WhiteDog wrote:On August 24 2013 04:35 JonnyBNoHo wrote:On August 24 2013 03:57 farvacola wrote:On August 24 2013 03:53 JonnyBNoHo wrote:On August 24 2013 03:16 WhiteDog wrote:On August 24 2013 01:32 JonnyBNoHo wrote:
[quote]
Yeah, people should be held accountable but I don't see anything in the memo that's a problem. It's just reaffirming what the public already knew - international trade in financial services was liberalized a few years ago.
Going a bit deeper, I know that liberalizing trade in financial services lead to a few governments and orgaizations in Euorpe to make bad decisions regarding derivatives, but that seems more like a governance in Europe problem than a banking or trade problem (seems small potatoes to the overall European debt crisis too).
The heart of the crisis in the US was a bank run in the repo market. I don't know Europe as well, but the main issue seems to be that pre-crisis, all sovereign debt in the Eurozone was being treated the same. Neither of those core issues (or the main issues surrounding them) have anything to do with the memo or the article about it. It is specifically written that one of the few people responsible for this "liberalization of markets (Larry Summers), which we know now was responsible for the crisis (because based on ideologies and irrealist models), was Obama's preferred choice for Chairman of the federal reserve... If you think the liberalisation and the deregulation has nothing to do with the crisis, then you are mistaking yourself. Greenspawn himself insisted on the fact that most models used by economists at the time refuted the simple idea of a crisis. I don't really have the time to argue, but it's not only a problem of risk management. Liberalization contributed, sure, but only at the margins. It was more of an accelerator than a core, fundamental issue. What makes you think this? I've read quite a bit on the crisis. The fundamental trigger was a bank run in the repo market. That run had many causes itself, most notably the mortgage credit bubble. Now that bubble itself has an assortment of causes. You can insert liberalization here as one of those. In addition you have to factor in central bank policy, the asian financial crisis (and subsequent bailout, and subsequent buildup of foreign reserves), fannie mae / freddie mac and other government policies. Now, had we not gone down the road of financial liberalization we can't say for certain how things would have turned out different. Plausibly, we would have either avoided a complete run and more likely the run / crisis would have been less severe. But! there would be a tradeoff - you'd lose the benefits of the liberalization (and they do exist). A plausible way out is to address the run itself - we stop bank runs at the retail level with deposit guarantees. Some regulation / restriction that addresses runs at the wholesale level (the repo market) could be used to address the last run. Additionally, regulations could mandate that banks 'hold' more equity which would address the poor incentives banks currently have to take excessive risk (bankers would hate this btw). What have you read ? Seems to me you read article written during the crisis (2007 - 2008). Since 2010, most work I've read on the crisis talk on the rôle of countries such as China, the global "saving glut" theory, the problem of systemic risks with new institutions like the hedge funds and the most recent work from the IMF even discuss the impact of inequalities on the crisis. ( source) Suffice to say, you are only describing the most obvious mechanisms when you point out the "financial" (as in financial innovations and market models) aspect of the crisis, but this aspect has to be put back into a more global frame to really describe what happened. About the benefit of liberalisation... they're a fraud most of the time. I am talking about the financial market, the deregulation of finance and the capital mobility it gives. I'm not talking about import and export of goods. I referenced the global savings glut when I wrote "and subsequent buildup of foreign reserves". The thing is, talking about global savings glut lead you to talk on ressource allocation and capital flux on the entire globe - which leads you into talking about market efficiency, inequalities in the development of financial sector all over the world, average saving rate in some countries, etc. It's not a question of ideology (we are talking about the IMF, not Krugman). Is that the IMF's official position? What you linked to was an interview with an economist who wrote in the book The Occupy Handbook. You need to read up on the global savings glut. The global savings glut is not a product of the singular force of financial and trade liberalization. The OPEC cartel and the Chinese government's official policy to encourage savings played huge roles. As did Asian governments official policy of encouraging net exports. I'm not sure what new systemic risks from hedge funds you are referencing (hedge funds are a broad category that overlaps with other financial players). As for inequality, that's a very controversial (i.e. unproven) factor. I'd rather avoid discussing the more speculative aspects, as that'll just lead to a typical ideological debate. Inequalities are not an unproven factor but whatever, it's not the subject here. As far as I know there is no consensus on that topic. Papers have been written that cite it as a cause, and papers have been written on it not being a cause. As for financial liberalization, a poor country isn't very capable of building modern factories and infrastructure without outside financing. So without that, their ability to export real goods and services will be hobbled. Yes but how did things happen in reality ? The savings of the entire planet flew to the US (because there are always perspective for investment in the US), and didn't finance "modern factories in infrastructure" in under developped countries. The entire idea of liberalisation (of finance) is based on the idea that market are efficient in allocating ressource, which they are not. This is not really the subject, but the fact is that when your economic policy is based on an ideology that refute any possibilities for crisis, that refute any possibilities for contagion, that consider that the market is efficient - meaning you cannot "win" against the market (which is true), but also that that the market always make the most "efficient" decision - then you are wrong and you should pay the price of the wrong decisions you've made. That's accountability. FDI to poor countries is often used to increase their economic development. This is an indisputable fact. Markets are efficient. This is another indisputable fact. They are not perfect, no one believes that they are. And no country has an economic policy build around the idea that they are perfect. No you don't understand my point about the global saving glut (I said it was a theory). It's something ben bernanke came with after the crisis, but there was no "global saving glut" in reality (too much saving for no investment opportunities), in reality what we saw was the inability of the international finance market to allocate the ressources - there are a lot of investment opportunities in the green market or in the under developed countries, with a high return rate. So why did it all go in those new "financial innovations" with high risks ? The problem is not that the chinese had too much savings, it is that all the savings they had rushed to the US. To show that I'm talking out of thin air, I'm giving an interview from Stiglitz : Show nested quote +That means what you call a savings glut. But now this is -- the final point I want to make, the issue is not a savings glut.
When you talk about savings glut, it's a balance of savings on the one hand and investment. And I'd rather call it an investment dearth and a shortage of investment, not of investment needs.
I look around the world and I say, look, a billion people in extreme poverty, more than that, a couple billion people in poverty. We need to invest, to enable their standard of living to go up.
The world faces a problem of global warming. We have to retrofit the whole global economy. That's going to take a lot of investment. We're talking about -- how are we going to change our, you know, investment in energy -- new energy systems, new transportation systems.
That's going to take a lot of investment. So we shouldn't be telling people, don't save. We should be figuring out how to take the savings and transform that into productive investment. And that comes back to the big failure in this crisis: the failure of the financial system to do its job.
Its job is to take savings and transform them into the place where they have the highest return. Putting savings into housing beyond people's ability to pay, in the richest country in the world, is not the globally most useful place to put the savings. http://www.cfr.org/united-states/global-economic-trends-conversation-joseph-e-stiglitz/p21301Also, the high saving rate in china is not only linked to China's encouragement toward savings, it is linked with the rather small banking system in china (no loan possible for most of the population for exemple) and the inexistance of "social security" in the broad sense, which force most chinese to save a lot of money "in case". This is one of the point that showed how liberalisation of the finantial market is a dumb thing to do : because at the scale of the planet, there are huge inequalities in the development of social security, health insurance, finance and banking sector, etc. About the IMF stance on inequalities, it's the stance of Olivier Blanchard I think (not sure ?) I could find some reference if you want. Depend on what you mean by efficient. And I am only talking about international financial market, not all "markets".
The savings glut didn't go into financial innovations. It went into US treasuries. By extension it also went into the "next best thing" - agency debt. US mortgages implicitly guaranteed by the US government. By extension to that it went into non agency mortgages, particularly the AAA senior tranches of MBS (which aren't particularly risky).
Bear in mind that part of the savings glut is part of explicit government policy to build foreign reserves and subsidize the business sector. The foreign reserve aspect isn't going to be invested in risky things, it's going to be put into save assets, namely US treasuries.
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On August 25 2013 03:17 JonnyBNoHo wrote:
particularly the AAA senior tranches of MBS (which aren't particularly risky).
not SUPPOSED to be risky, but when it's been repackaged eight times who knows. no longer any reference to reality there. posner talks a lot about this particular issue in his book http://www.amazon.com/Crisis-Capitalist-Democracy-Honorable-Richard/dp/0674062191
what i love about finance is that it is this big priesthood for convincing people, "don't worry, nothing bad will happen in the future! it is prophesied!" but people also believe that they are atheists
edit: everything needs to be slower, smaller, simpler, and less mediated. now can we all admit that I'm the only real conservative here
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On August 25 2013 04:59 sam!zdat wrote:Show nested quote +On August 25 2013 03:17 JonnyBNoHo wrote:
particularly the AAA senior tranches of MBS (which aren't particularly risky). not SUPPOSED to be risky, but when it's been repackaged eight times who knows. no longer any reference to reality there. posner talks a lot about this particular issue in his book http://www.amazon.com/Crisis-Capitalist-Democracy-Honorable-Richard/dp/0674062191what i love about finance is that it is this big priesthood for convincing people, "don't worry, nothing bad will happen in the future! it is prophesied!" but people also believe that they are atheists edit: everything needs to be slower, smaller, simpler, and less mediated. now can we all admit that I'm the only real conservative here
Things should be less speculative, but not less mediated.
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On August 25 2013 05:32 Roe wrote:Show nested quote +On August 25 2013 04:59 sam!zdat wrote:On August 25 2013 03:17 JonnyBNoHo wrote:
particularly the AAA senior tranches of MBS (which aren't particularly risky). not SUPPOSED to be risky, but when it's been repackaged eight times who knows. no longer any reference to reality there. posner talks a lot about this particular issue in his book http://www.amazon.com/Crisis-Capitalist-Democracy-Honorable-Richard/dp/0674062191what i love about finance is that it is this big priesthood for convincing people, "don't worry, nothing bad will happen in the future! it is prophesied!" but people also believe that they are atheists edit: everything needs to be slower, smaller, simpler, and less mediated. now can we all admit that I'm the only real conservative here Things should be less speculative, but not less mediated.
why do you say that
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Calling for slower smaller simpler and less mediated in a trend of bigger, more complex, and (off and on) more mediated is a pretty liberal idea, wouldn't you think?
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On August 25 2013 05:37 Danglars wrote:
Calling for slower smaller simpler and less mediated in a trend of bigger, more complex, and (off and on) more mediated is a pretty liberal idea, wouldn't you think?
no...
this seems to me the definition of a conservatism. there is not a liberal bone in my body.
i am trying to defend ancient Western ideas about human flourishing, the good life, critical thought, eudaimonia, etc etc and so on against the tide of liberalism and technocratic rationality and the total banalization of everything existing by a bunch of upstart money-counters who seem to have to taken over the world. if that doesn't make me a conservative i don't know what does.
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Shipping company UPS will no longer make health insurance benefits available to some 15,000 employee spouses.
UPS blamed the move on several aspects of Obamacare, including mandatory coverage for dependent children up to age 26 and new government fees.
“If you like the plan you have, you can keep it.”
-Barack Obama
The sad part is, people are surprised by all these stories. They still take political claims at face value.
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On August 25 2013 05:37 sam!zdat wrote:Show nested quote +On August 25 2013 05:32 Roe wrote:On August 25 2013 04:59 sam!zdat wrote:On August 25 2013 03:17 JonnyBNoHo wrote:
particularly the AAA senior tranches of MBS (which aren't particularly risky). not SUPPOSED to be risky, but when it's been repackaged eight times who knows. no longer any reference to reality there. posner talks a lot about this particular issue in his book http://www.amazon.com/Crisis-Capitalist-Democracy-Honorable-Richard/dp/0674062191what i love about finance is that it is this big priesthood for convincing people, "don't worry, nothing bad will happen in the future! it is prophesied!" but people also believe that they are atheists edit: everything needs to be slower, smaller, simpler, and less mediated. now can we all admit that I'm the only real conservative here Things should be less speculative, but not less mediated. why do you say that
The great amount of speculation seems like a great cause of bubbles and instability in the economy. Mediation of resources should only help this by introducing third parties which take some of the capital away from top-heavy, speculative-driven organizations.
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On August 25 2013 04:59 sam!zdat wrote:Show nested quote +On August 25 2013 03:17 JonnyBNoHo wrote:
particularly the AAA senior tranches of MBS (which aren't particularly risky). not SUPPOSED to be risky, but when it's been repackaged eight times who knows. no longer any reference to reality there. posner talks a lot about this particular issue in his book http://www.amazon.com/Crisis-Capitalist-Democracy-Honorable-Richard/dp/0674062191what i love about finance is that it is this big priesthood for convincing people, "don't worry, nothing bad will happen in the future! it is prophesied!" but people also believe that they are atheists edit: everything needs to be slower, smaller, simpler, and less mediated. now can we all admit that I'm the only real conservative here
I don't think that's correct. A core aspect of finance is the idea that finance cannot eliminate risk, only manage and shift it. So I don't see where the high preisthood is claiming that nothing bad will happen in the future.
For something specific like a MBS, risk is shifted away from the senior tranche to the junior and equity tranches. And that risk management worked just fine. AAA tranches suffered extremely low default rates:
![[image loading]](http://www.standardandpoors.com/spf/fgr_articles/858444/6143068.gif)
Link
The real problem with the AAA's wasn't that they defaulted a lot, it was that they defaulted enough to no longer be seen as a safe asset in the repo markets. Cue de facto bank run.
P.S. is that a good book? If so, does it come in audio book format?
Edit: The repackaging did create information asymmetries which contributed to the repo market no longer seeing the securities as a safe asset.
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On August 25 2013 03:17 JonnyBNoHo wrote:Show nested quote +On August 25 2013 02:58 WhiteDog wrote:On August 25 2013 02:44 JonnyBNoHo wrote:On August 25 2013 02:13 WhiteDog wrote:On August 25 2013 00:35 JonnyBNoHo wrote:On August 24 2013 17:18 WhiteDog wrote:On August 24 2013 04:35 JonnyBNoHo wrote:On August 24 2013 03:57 farvacola wrote:On August 24 2013 03:53 JonnyBNoHo wrote:On August 24 2013 03:16 WhiteDog wrote:
[quote]
It is specifically written that one of the few people responsible for this "liberalization of markets (Larry Summers), which we know now was responsible for the crisis (because based on ideologies and irrealist models), was Obama's preferred choice for Chairman of the federal reserve...
If you think the liberalisation and the deregulation has nothing to do with the crisis, then you are mistaking yourself. Greenspawn himself insisted on the fact that most models used by economists at the time refuted the simple idea of a crisis. I don't really have the time to argue, but it's not only a problem of risk management. Liberalization contributed, sure, but only at the margins. It was more of an accelerator than a core, fundamental issue. What makes you think this? I've read quite a bit on the crisis. The fundamental trigger was a bank run in the repo market. That run had many causes itself, most notably the mortgage credit bubble. Now that bubble itself has an assortment of causes. You can insert liberalization here as one of those. In addition you have to factor in central bank policy, the asian financial crisis (and subsequent bailout, and subsequent buildup of foreign reserves), fannie mae / freddie mac and other government policies. Now, had we not gone down the road of financial liberalization we can't say for certain how things would have turned out different. Plausibly, we would have either avoided a complete run and more likely the run / crisis would have been less severe. But! there would be a tradeoff - you'd lose the benefits of the liberalization (and they do exist). A plausible way out is to address the run itself - we stop bank runs at the retail level with deposit guarantees. Some regulation / restriction that addresses runs at the wholesale level (the repo market) could be used to address the last run. Additionally, regulations could mandate that banks 'hold' more equity which would address the poor incentives banks currently have to take excessive risk (bankers would hate this btw). What have you read ? Seems to me you read article written during the crisis (2007 - 2008). Since 2010, most work I've read on the crisis talk on the rôle of countries such as China, the global "saving glut" theory, the problem of systemic risks with new institutions like the hedge funds and the most recent work from the IMF even discuss the impact of inequalities on the crisis. ( source) Suffice to say, you are only describing the most obvious mechanisms when you point out the "financial" (as in financial innovations and market models) aspect of the crisis, but this aspect has to be put back into a more global frame to really describe what happened. About the benefit of liberalisation... they're a fraud most of the time. I am talking about the financial market, the deregulation of finance and the capital mobility it gives. I'm not talking about import and export of goods. I referenced the global savings glut when I wrote "and subsequent buildup of foreign reserves". The thing is, talking about global savings glut lead you to talk on ressource allocation and capital flux on the entire globe - which leads you into talking about market efficiency, inequalities in the development of financial sector all over the world, average saving rate in some countries, etc. It's not a question of ideology (we are talking about the IMF, not Krugman). Is that the IMF's official position? What you linked to was an interview with an economist who wrote in the book The Occupy Handbook. You need to read up on the global savings glut. The global savings glut is not a product of the singular force of financial and trade liberalization. The OPEC cartel and the Chinese government's official policy to encourage savings played huge roles. As did Asian governments official policy of encouraging net exports. I'm not sure what new systemic risks from hedge funds you are referencing (hedge funds are a broad category that overlaps with other financial players). As for inequality, that's a very controversial (i.e. unproven) factor. I'd rather avoid discussing the more speculative aspects, as that'll just lead to a typical ideological debate. Inequalities are not an unproven factor but whatever, it's not the subject here. As far as I know there is no consensus on that topic. Papers have been written that cite it as a cause, and papers have been written on it not being a cause. As for financial liberalization, a poor country isn't very capable of building modern factories and infrastructure without outside financing. So without that, their ability to export real goods and services will be hobbled. Yes but how did things happen in reality ? The savings of the entire planet flew to the US (because there are always perspective for investment in the US), and didn't finance "modern factories in infrastructure" in under developped countries. The entire idea of liberalisation (of finance) is based on the idea that market are efficient in allocating ressource, which they are not. This is not really the subject, but the fact is that when your economic policy is based on an ideology that refute any possibilities for crisis, that refute any possibilities for contagion, that consider that the market is efficient - meaning you cannot "win" against the market (which is true), but also that that the market always make the most "efficient" decision - then you are wrong and you should pay the price of the wrong decisions you've made. That's accountability. FDI to poor countries is often used to increase their economic development. This is an indisputable fact. Markets are efficient. This is another indisputable fact. They are not perfect, no one believes that they are. And no country has an economic policy build around the idea that they are perfect. No you don't understand my point about the global saving glut (I said it was a theory). It's something ben bernanke came with after the crisis, but there was no "global saving glut" in reality (too much saving for no investment opportunities), in reality what we saw was the inability of the international finance market to allocate the ressources - there are a lot of investment opportunities in the green market or in the under developed countries, with a high return rate. So why did it all go in those new "financial innovations" with high risks ? The problem is not that the chinese had too much savings, it is that all the savings they had rushed to the US. To show that I'm talking out of thin air, I'm giving an interview from Stiglitz : That means what you call a savings glut. But now this is -- the final point I want to make, the issue is not a savings glut.
When you talk about savings glut, it's a balance of savings on the one hand and investment. And I'd rather call it an investment dearth and a shortage of investment, not of investment needs.
I look around the world and I say, look, a billion people in extreme poverty, more than that, a couple billion people in poverty. We need to invest, to enable their standard of living to go up.
The world faces a problem of global warming. We have to retrofit the whole global economy. That's going to take a lot of investment. We're talking about -- how are we going to change our, you know, investment in energy -- new energy systems, new transportation systems.
That's going to take a lot of investment. So we shouldn't be telling people, don't save. We should be figuring out how to take the savings and transform that into productive investment. And that comes back to the big failure in this crisis: the failure of the financial system to do its job.
Its job is to take savings and transform them into the place where they have the highest return. Putting savings into housing beyond people's ability to pay, in the richest country in the world, is not the globally most useful place to put the savings. http://www.cfr.org/united-states/global-economic-trends-conversation-joseph-e-stiglitz/p21301Also, the high saving rate in china is not only linked to China's encouragement toward savings, it is linked with the rather small banking system in china (no loan possible for most of the population for exemple) and the inexistance of "social security" in the broad sense, which force most chinese to save a lot of money "in case". This is one of the point that showed how liberalisation of the finantial market is a dumb thing to do : because at the scale of the planet, there are huge inequalities in the development of social security, health insurance, finance and banking sector, etc. About the IMF stance on inequalities, it's the stance of Olivier Blanchard I think (not sure ?) I could find some reference if you want. Markets are efficient. This is another indisputable fact. Depend on what you mean by efficient. And I am only talking about international financial market, not all "markets". The savings glut didn't go into financial innovations. It went into US treasuries. By extension it also went into the "next best thing" - agency debt. US mortgages implicitly guaranteed by the US government. By extension to that it went into non agency mortgages, particularly the AAA senior tranches of MBS (which aren't particularly risky). Bear in mind that part of the savings glut is part of explicit government policy to build foreign reserves and subsidize the business sector. The foreign reserve aspect isn't going to be invested in risky things, it's going to be put into save assets, namely US treasuries.
I didn't go into detail because I thought it was irrelevant. The mortgages where AAA because they were mixed government bonds if I remember correctly ?
They were risked, but the various type of risks were somehow invisible (or put aside) due to the various financial plans - the "subprime" (basically what you are am I right ? the language in english is not exactly the same as in french and as I said I've read about that two years ago) or the credit default swap. But as I said, it is not only a question of risk management.
As I was trying to say, but maybe I'm not clear enough, the main problem was that a high saving rate in some countries associated with a high capital mobility resulted in a global flux of savings from china and other countries with high savings to the developped countries.
The fact that it lead to a bubble is secondary (it was bound to happen - the banking system in the developped countries only did all they could to catch the free money that was flying around), what is important is that the finance system does not allocate the capital well enough : there are (were) needs for investments in under developped countries, and even in developped countries, there are some investments who offer a very high return on investment (around 40% in the green market, I've had confirmation from professionnals in France).
Ask yourself the question : why all the money did go to developped countries ? And why did it specifically go to such mortgages ? The response is why the liberalisation of finance is a stupid dream.
I am still waiting for you to prove to me that the financial market is efficient and what do you mean by efficient.
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On August 25 2013 06:12 WhiteDog wrote:Show nested quote +On August 25 2013 03:17 JonnyBNoHo wrote:On August 25 2013 02:58 WhiteDog wrote:On August 25 2013 02:44 JonnyBNoHo wrote:On August 25 2013 02:13 WhiteDog wrote:On August 25 2013 00:35 JonnyBNoHo wrote:On August 24 2013 17:18 WhiteDog wrote:On August 24 2013 04:35 JonnyBNoHo wrote:On August 24 2013 03:57 farvacola wrote:On August 24 2013 03:53 JonnyBNoHo wrote:
[quote]
Liberalization contributed, sure, but only at the margins. It was more of an accelerator than a core, fundamental issue. What makes you think this? I've read quite a bit on the crisis. The fundamental trigger was a bank run in the repo market. That run had many causes itself, most notably the mortgage credit bubble. Now that bubble itself has an assortment of causes. You can insert liberalization here as one of those. In addition you have to factor in central bank policy, the asian financial crisis (and subsequent bailout, and subsequent buildup of foreign reserves), fannie mae / freddie mac and other government policies. Now, had we not gone down the road of financial liberalization we can't say for certain how things would have turned out different. Plausibly, we would have either avoided a complete run and more likely the run / crisis would have been less severe. But! there would be a tradeoff - you'd lose the benefits of the liberalization (and they do exist). A plausible way out is to address the run itself - we stop bank runs at the retail level with deposit guarantees. Some regulation / restriction that addresses runs at the wholesale level (the repo market) could be used to address the last run. Additionally, regulations could mandate that banks 'hold' more equity which would address the poor incentives banks currently have to take excessive risk (bankers would hate this btw). What have you read ? Seems to me you read article written during the crisis (2007 - 2008). Since 2010, most work I've read on the crisis talk on the rôle of countries such as China, the global "saving glut" theory, the problem of systemic risks with new institutions like the hedge funds and the most recent work from the IMF even discuss the impact of inequalities on the crisis. ( source) Suffice to say, you are only describing the most obvious mechanisms when you point out the "financial" (as in financial innovations and market models) aspect of the crisis, but this aspect has to be put back into a more global frame to really describe what happened. About the benefit of liberalisation... they're a fraud most of the time. I am talking about the financial market, the deregulation of finance and the capital mobility it gives. I'm not talking about import and export of goods. I referenced the global savings glut when I wrote "and subsequent buildup of foreign reserves". The thing is, talking about global savings glut lead you to talk on ressource allocation and capital flux on the entire globe - which leads you into talking about market efficiency, inequalities in the development of financial sector all over the world, average saving rate in some countries, etc. It's not a question of ideology (we are talking about the IMF, not Krugman). Is that the IMF's official position? What you linked to was an interview with an economist who wrote in the book The Occupy Handbook. You need to read up on the global savings glut. The global savings glut is not a product of the singular force of financial and trade liberalization. The OPEC cartel and the Chinese government's official policy to encourage savings played huge roles. As did Asian governments official policy of encouraging net exports. I'm not sure what new systemic risks from hedge funds you are referencing (hedge funds are a broad category that overlaps with other financial players). As for inequality, that's a very controversial (i.e. unproven) factor. I'd rather avoid discussing the more speculative aspects, as that'll just lead to a typical ideological debate. Inequalities are not an unproven factor but whatever, it's not the subject here. As far as I know there is no consensus on that topic. Papers have been written that cite it as a cause, and papers have been written on it not being a cause. As for financial liberalization, a poor country isn't very capable of building modern factories and infrastructure without outside financing. So without that, their ability to export real goods and services will be hobbled. Yes but how did things happen in reality ? The savings of the entire planet flew to the US (because there are always perspective for investment in the US), and didn't finance "modern factories in infrastructure" in under developped countries. The entire idea of liberalisation (of finance) is based on the idea that market are efficient in allocating ressource, which they are not. This is not really the subject, but the fact is that when your economic policy is based on an ideology that refute any possibilities for crisis, that refute any possibilities for contagion, that consider that the market is efficient - meaning you cannot "win" against the market (which is true), but also that that the market always make the most "efficient" decision - then you are wrong and you should pay the price of the wrong decisions you've made. That's accountability. FDI to poor countries is often used to increase their economic development. This is an indisputable fact. Markets are efficient. This is another indisputable fact. They are not perfect, no one believes that they are. And no country has an economic policy build around the idea that they are perfect. No you don't understand my point about the global saving glut (I said it was a theory). It's something ben bernanke came with after the crisis, but there was no "global saving glut" in reality (too much saving for no investment opportunities), in reality what we saw was the inability of the international finance market to allocate the ressources - there are a lot of investment opportunities in the green market or in the under developed countries, with a high return rate. So why did it all go in those new "financial innovations" with high risks ? The problem is not that the chinese had too much savings, it is that all the savings they had rushed to the US. To show that I'm talking out of thin air, I'm giving an interview from Stiglitz : That means what you call a savings glut. But now this is -- the final point I want to make, the issue is not a savings glut.
When you talk about savings glut, it's a balance of savings on the one hand and investment. And I'd rather call it an investment dearth and a shortage of investment, not of investment needs.
I look around the world and I say, look, a billion people in extreme poverty, more than that, a couple billion people in poverty. We need to invest, to enable their standard of living to go up.
The world faces a problem of global warming. We have to retrofit the whole global economy. That's going to take a lot of investment. We're talking about -- how are we going to change our, you know, investment in energy -- new energy systems, new transportation systems.
That's going to take a lot of investment. So we shouldn't be telling people, don't save. We should be figuring out how to take the savings and transform that into productive investment. And that comes back to the big failure in this crisis: the failure of the financial system to do its job.
Its job is to take savings and transform them into the place where they have the highest return. Putting savings into housing beyond people's ability to pay, in the richest country in the world, is not the globally most useful place to put the savings. http://www.cfr.org/united-states/global-economic-trends-conversation-joseph-e-stiglitz/p21301Also, the high saving rate in china is not only linked to China's encouragement toward savings, it is linked with the rather small banking system in china (no loan possible for most of the population for exemple) and the inexistance of "social security" in the broad sense, which force most chinese to save a lot of money "in case". This is one of the point that showed how liberalisation of the finantial market is a dumb thing to do : because at the scale of the planet, there are huge inequalities in the development of social security, health insurance, finance and banking sector, etc. About the IMF stance on inequalities, it's the stance of Olivier Blanchard I think (not sure ?) I could find some reference if you want. Markets are efficient. This is another indisputable fact. Depend on what you mean by efficient. And I am only talking about international financial market, not all "markets". The savings glut didn't go into financial innovations. It went into US treasuries. By extension it also went into the "next best thing" - agency debt. US mortgages implicitly guaranteed by the US government. By extension to that it went into non agency mortgages, particularly the AAA senior tranches of MBS (which aren't particularly risky). Bear in mind that part of the savings glut is part of explicit government policy to build foreign reserves and subsidize the business sector. The foreign reserve aspect isn't going to be invested in risky things, it's going to be put into save assets, namely US treasuries. I didn't go into detail because I thought it was irrelevant. The mortgages where AAA because they were mixed government bonds if I remember correctly ? They were risked, but the various type of risks were somehow invisible (or put aside) due to the various financial plans - the "subprime" (basically what you are am I right ? the language in english is not exactly the same as in french and as I said I've read about that two years ago) or the credit default swap. But as I said, it is not only a question of risk management. As I was trying to say, but maybe I'm not clear enough, the main problem was that a high saving rate in some countries associated with a high capital mobility resulted in a global flux of savings from china and other countries with high savings to the developped countries. The fact that it lead to a bubble is secondary (it was bound to happen - the banking system in the developped countries only did all they could to catch the free money that was flying around), what is important is that the finance system does not allocate the capital well enough : there are (were) needs for investments in under developped countries, and even in developped countries, there are some investments who offer a very high return on investment (around 40% in the green market, I've had confirmation from professionnals in France). Ask yourself the question : why all the money did go to developped countries ? And why did it specifically go to such mortgages ? The response is why the liberalisation of finance is a stupid dream. I am still waiting for you to prove to me that the financial market is efficient and what do you mean by efficient.
No they weren't AAA because they were mixed with government bonds. See my reply to Sam above, or a nice primer on CDOs here.
The high savings rate in developing countries was largely used in developing countries for new investment. The savings glut in US treasuries is mainly a function of import / export markets and the policy directive of accumulating foreign reserves. And make no mistake - this was a winning formula for developing countries. Developing countries outperformed advanced economies in the 2000's (advanced economies outperformed in the 90's):
![[image loading]](http://cdn.static-economist.com/sites/default/files/imagecache/290-width/images/print-edition/C/20130727_FBC128.png)
Investment was absolutely a factor in that. Ever hear of US companies outsourcing to China and other parts of Asia? That's investment!
As for why so much money went into mortgages, read the post you are replying to. I explained it there. If you have further questions ask something specific.
And your very high returns on investment in developing countries is really a high expected return. Bear in mind, those investments are high risk, hence the high return.
By efficient I mean in terms of capital allocation and pricing. Projects valuation should involve risk and higher value projects should be prioritized. How efficient we're talking about depends on what market we're discussing. Not all markets are equally efficient.
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Well whatever you don't see my point. Also you are completly mistaking the difference between "under developped countries" and the few developing countries who benfitted from the mobility of capital. China didn't "win" because of investment, it had good results because of cheap labor.
It is not a high expected return, it is a high return on investment plain and simple.
And finance market is not efficient in capital allocation and pricing - it is "supposed" as such (strong form efficiency) but it is, in practice, not evolving the same way as a "normal" market (if any normal markets actually exist in the first place). Look at Eugene Fama hypothesis on market efficiency, and read Samuelson work (that Fama used to build his own theory), you will see that the idea of market efficiency is not about that : they talk about the impossibility to predict the future price of an action through the past price of the said action.
It is in this way that financial market are "efficient".
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EPT
