Ken’s POV: I’ve been saying — only half in jest — that Wal Mart is at the root of the financial mess. Not because they’re bad guys, but because they have been able to keep retail prices so low for so long — via efficient logistics and smart procurement, buying lots of low cost goods from off-shore. Why is that important? Because the Fed trades off inflation and unemployment when it sets interest rates. When inflation is low, rates can stay low to enable growth. Wal Mart is big enough that it alone had a major impact suppressing inflation. Well, prices stayed low and interest rates stayed low, so folks were able to make dumb decisions (higher rates make people think harder about financial decisions, and discourages debt-building). What I was missing was the China Syndrome — the transfer and recycling of wealth from the US to China and back. Now, that’s a problem.
* * * * *
Excerpted from Wash Post: “Blaming Deregulation”, Sebastian Mallaby, Oct. 6, 2008
* * * * *
The claim that the financial crisis reflects Bush-McCain deregulation is … only nonsense.
The real roots of the crisis lie in a flawed response to China. Starting in the 1990s, the flood of cheap products from China kept global inflation low, allowing central banks to operate relatively loose monetary policies. But the flip side of China’s export surplus was that China had a capital surplus, too. Chinese savings sloshed into asset markets ’round the world, driving up the price of everything from Florida condos to Latin American stocks.
That gave central bankers a choice: Should they carry on targeting regular consumer inflation, which Chinese exports had pushed down, or should they restrain asset inflation, which Chinese savings had pushed upward? Alan Greenspan’s Fed chose to stand aside as asset prices rose; it preferred to deal with bubbles after they popped by cutting interest rates rather than by preventing those bubbles from inflating. After the dot-com bubble, this clean-up-later policy worked fine. With the real estate bubble, it has proved disastrous.
So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that. Moreover, the Fed’s track record of cutting interest rates to clear up previous bubbles had created a seductive one-way bet. Financial engineers built huge mountains of debt partly because they expected to profit in good times — and then be rescued by the Fed when they got into trouble.
* * * * *
Framing the mess as the product of deregulation will make the backlash nastier.
The next president will have to make some subtle choices. In certain areas, markets need to be reformed — by pushing murky “over-the-counter” trades between banks onto transparent exchanges, for example. In other areas, government needs to fix itself — by not subsidizing reckless mortgage lending … Everyone concedes that Fannie and Freddie poured fuel on the fire to the tune of hundreds of billions of dollars.
* * * * *
See the full article for a strong argument re: why “soft” regulation didn’t cause the current mess.
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/05/AR2008100501253_pf.html
* * * * *
Want more from the Homa Files?
Click link => The Homa Files Blog
The Homa Files 