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CitePut simply, the agreement at the London summit — if key countries actually carry through on their commitment to expand the IMF’s resources — allows the IMF to be able to both:
a) lend large sums, conditionally, to a host of countries in Eastern Europe that ran large current account deficit and are now having trouble rolling over their debts; and
b) lend large sums to a set of emerging economies that didn’t run large current account deficits and don’t have large stocks of external debt outstanding but still are facing a bit of pressure right now — whether from falling capital flows, falling commodity prices or falling demand for the goods — and wouldn’t mind a few more reserves.
A $250 billion IMF would have been stretched to just meet Eastern Europe’s need for emergency financing. It was too small, in some sense, to even be Europe’s monetary fund. A $750 billion IMF is big enough to be able to offer meaningful sums to the larger emerging economies — think of the $50 billion Mexico wants to be able to borrow if it needs it — and still cover a large share of Eastern Europe’s need for emergency financing.
Here is one way of thinking about the IMF’s need for resources:
At the end of 1997 — at the height of Asia’s crisis — the IMF had about $150 billion to lend, a sum that rose to around $250 billion after the IMF’s quotas were increased and the New Arrangement to Borrow provided the IMF with a bigger supplemental credit line.
At the end of 1997, emerging economies at the time had borrowed — according to the BIS — $1.045 trillion from the international banks. They also had something like $300 billion in external sovereign bonds outstanding. And they only had about $600 billion in reserves (from the IMF’s COFER data)
If the fall in bank lending to the emerging world in the years that followed Asia’s crisis had been financed entirely out of existing reserves, the roughly $200 billion fall in gross cross-border bank lending from 1997 to 2000 would have left the emerging world dangerously under-reserved. In practice, that “deleveraging” process was largely financed by a big swing in the emerging world’s current account balance. Deficits turned to surpluses, and the surpluses were used to repay debt.
Absent IMF lending, and agreements like the one that Korea reached with its bank creditors in 1997 to rollover maturing debts, that process would have been even more disruptive. Even so, the emerging world subtracted from global demand growth for a few years. A booming US, though, picked up much of the slack.
A comparable US boom obviously isn’t in the cards right now. And many emerging markets are facing similar pressures.
At the end of the third quarter, emerging economies had — according to the BIS borrowed about $2.75 trillion from the world’s banks. Gross borrowing soared over the past few years. Emerging economies also had about $4.5 trillion in reserves.
Alas, China alone accounted for a little less half of all reserves ($2 trillion) even though it accounts for a fairly small share of cross-border bank borrowing. The distribution of reserves globally doesn’t match the distribution of debt. Some countries have a lot of reserves and little external debt (China, Saudi Arabia), some have a lot of reserves and a lot of external debt (Russia, Korea) and some have a lot of external debt and not-nearly-enough reserves.
The IMF’s $250 billion simply wasn’t enough to provide much insurance against a big fall in cross border bank lending. It is small relative to the $2.75 trillion in cross-border bank debt outstanding, and bank debt isn’t the only source of pressure on countries’ balance of payments.
Capital flows had grown more rapidly than the IMF’s lending capacity. If capital flows were stable that wouldn’t have been a problem. But they weren’t, and the IMF’s small size really was crimping the world’s ability to respond to one aspect of the current crisis. As my colleagues at the Council’s Center for Geoeconomic Studies have documented, the expansion of the IMF’s lending capacity puts it back in the game. Do check out Paul Swartz’s graph.
Give Secretary Geithner – and Ted Truman — credit for recognizing that the IMF’s limited resources were a growing problem and then building global consensus on the need to expand the IMF’s lending capacity.*
The US though can only do its part if Congress authorizes a bigger US contribution to the IMF’s backstop credit line. It should. A world where many emerging economies cannot borrow is also a world where many emerging economies cannot buy US goods. And a world where Eastern Europe falls into a deep, deep crisis less than twenty years after the end of the cold war wouldn’t exactly be a victory for US foreign policy either …
* Full disclosure: I worked for Mr. Geithner and Mr. Truman from 1998 to 2000.
If the IMF is expected to act like an insurance for bank lending for emerging markets, it should be financed like an insurance company, gathering premiums based on the amount of lending it is backing, and not like a bank, which only gets revenues when it lends the money out. Not too long ago, there were concerns that the IMF might not be able to pay its bills because countries were reluctant to borrow from it.
That the distribution of debt is in a mismatch of the debt distribution is indeed problematic on a per unit basis.
There was a lot of verbal rhetoric at the G20, but i do caution that the verbal exchange has yet to take action. Alot of verbal promises, and global markets surely are excited. Financials and REITs rallying nearly 100% from lows.
But we need to take a step back and ask, is this realistic?
Remember, leaders make other leaders many promises, but history shows that after months and as economic conditions worsen…unavoidable and inevitable circumstances rest in the cards.
We have yet to witness the true heart of the crisis. The G20 was based on words, and promise. Not action or completion.
Also quick note to those buying this rally to double check the Baltic Dry Index. Based on the media you’d think China is back to Exporting levels of 07, but the BD-index confirms Chinese exports are continuing to dive off a cliff. This should also hint that the U.s. consumer is strained.
Mark this post: BDI will be up even more starting May: you can bank on that one! I’d go long bulk shippers now if they weren’t already up so much.
As for G20, a LOT was accomplished: the IMF recapitalization is A HUGE DEAL: it means EM’s and NIC’s are no longer a bad day away from implosion and de-risks the entire global economy.
Yes, contraction and redistribution are necessary, but the Mad-Max cataclysm has been averted.
That doesn’t mean life won’t suck: there’s a big difference!
rajesh — ted truman once proposed that the imf be financed by a tax on cross border exposure …
alas, opposition to a supranational tax meant that never got off the groud
BTW, the Fed’s B/S can expand so long as ST rates < GDP.
We, the Leaders of the Group of Twenty, will use every cent we don’t possess to rescue corporate capitalism from its contradictions and set the world economy back onto the path of unsustainable growth. We have already spent trillions of dollars of your money on bailing out the banks, so that they can be returned to their proper functions of fleecing the poor and wrecking the Earth’s living systems. Now we’re going to spend another $1.1 trillion. As an exemplary punishment for their long record of promoting crises, we will give the IMF and the World Bank even more of your money. These actions constitute the greatest mobilisation of resources to support global financial flows in modern times.
The adjustment for a sound global economy is postponed by clever scheme of your former bosses.
Why people in Eastern Europe bought homes by mortgages in JPY? Because the price of homes were not affordable in local prices. Who guaranted this price distortion? Doesn’t IMF now implicitly guarantee price distotion on global scale and destroy market economy?
What AIG did to US and European financial system will be repeated by IMF. Namely it will further distort price mechanism and risk premiums and lead furher devastation in Eastern Europe and many free spending countries.
Congratulations to you also for your incessant savings glut rhetoric.You convinced many policy makers that sun revolves around earth.
Is it any coincedence that many people who saw this unravelling beforehand were never consulted by policymakers yet your former bosses who caused these are still in charge.
kaan — savings glut rhetoric? in all honesty, have you looked at the imf’s data on emerging market savings rates (presented in the appendix to the WEO), especially the data for the middle east and developing asia?
The data, not any rhetoric, shows a significant rise in the developing world’s savings rate, especially after 04 — paced by the simultaneous rise in developing asia’s savings rate and the oil exporters savings rate (normally they would move in opposite directions). in both regions investment rose, but savings rose by more —
We can debate the causes of this — i.e. it could reflect excessive stimulus in the advanced economies, not policies in the emerging economies — but a rise in the developing world’s savings rate that exceeded the rise in the developing world’s investment rate is a fact. those who argue to the contrary are the ones defending a pre-copernican theory. unless, of course, the imf’s data is off.
i fully know that many object to the savings glut formulation b/c it deflects blame from the us — and b/c it was first put forward by the bush admin. and the same time, the hard data showing a rise in emerging market savings in excess of the rise in investment is — in my view — quite clear. I fully share the criticism of US policy makers that argues that they put forward the savings glut thesis to argue that there was no need to do anything in the face of a large external deficit, domestic imbalances and a rise in housing prices. and on this i think i have a certain amount of credibility, as well, i have a public record on these issues dating back to 2004. Policy makers in the past didn’t seem to view the savings glut in the emerging world/ us deficit (which clearly reflected a dearth of savings in the us) as a problem. But that doesn’t mean that aggregate savings rates didn’t rise in the emerging world.
Mr. Geithner public statements consistently expressed concern about the us external deficit, and at one point he argued in a speech while a governor of the ny fed that excess reserve growth abroad masked the impact of us budget deficits and a low us savings rate. he never, to my knowledge, argued that the large us deficit was a good thing. And Mr. Truman has a public record on these issues — one that i would argue shows a consistent concern about the rise in the us external deficit. At one point he argued that the us needed to tighten monetary policy as us aggregate demand growth was faster than the growth in aggregate supply.
Do look at the data in the WEO (google imf weo, statistical appendix and find the tables on global savings and investment) and then let me know if i have mischaracterized the data. Also look at the relevant speeches by Mr. Geithner and Ted Truman’s papers at the peterson institute, and let me know if i have mischaracterized them. Geithner’s speech’s aren;t hard to find; i collected most of them in the post i linked to under full disclosure.
as for Eastern europe, i fully agree that the JPY and CHF and EUR denomianted mortgages were (and are) a big problem. Many of those mortgages will go into default, with large losses to those who made the loans. the imf programs won;t prevent that. But the past is the past. the question now tho is whether the world economy would be in better position if the imf didn’t lend to troubled eastern european economies, something that would likely imply a round of defaults. i would argue the answer to that is no.
«Why people in Eastern Europe bought homes by mortgages in JPY? Because the price of homes were not affordable in local prices.»
“affordable” is in the eye of the beholder, but even so this statement is ridiculous.
The people in Eastern Europe borrowed in strong currency because they wanted to speculate in a house price boom, by arbitraging strong vs. weak currency interest rates vs. real estate appreciation.
The availability of unlimited yen at 0% wholesale *made* those houses unaffordable.
«Who guaranted this price distortion? Doesn’t IMF now implicitly guarantee price distotion on global scale and destroy market economy?»
Well, the goal of all the price intervention by IMF and its controlling government (the USA) is to get the nominal prices of asset going up again.
total debd (only US) standing 350% of GDB
no way that the injection of one trillion can reinflate assets prices, dont you think ?
Is it just me or is Geithners plan a total “middle finger” to the majority of 300M americans?
So Goldman, Morgan, and Citi can use 90+% of taxpayer liabilities to swap Toxic (aka WORTHLESS assets) from 1 bank to the next???
Something tells me Geithner knew he wouldn’t be able to get a dime from Congress/Senate, therefore Geithner came up with this scheme so that 300M (majority polite, kind and good individuals) think it’s the “private sector” making the large investments.
Majority of Americans, unfortunately don’t read the documents, only the headlines.
Geithner and Summers know this. From a moral, fair, and truly honest position I feel that Bad banks buying bad assets with Taxpayer dollars sold as “bad assets being bought by private investors (aka 10B hedge funds with executive payouts of 10M+/year) is really sad.
I’ll be the first person to voice out against this. Although I do admire TG, and I do admire President Obama, and I do think Mr. Setser is an amazing contributor to this board I have to say, on behalf of many Americans that PPIP is unjustified.
It will likely end bad, but now not only for the banks, but also the U.S. Taxpayers who will be swallowed in debt.
I hope Mr. Geithner reads this blog, and understands that I stand by his side, but it will be difficult to truly look in his eyes and give him a handshake.
«imf’s data on emerging market savings rates (presented in the appendix to the WEO), especially the data for the middle east and developing asia?»
But talking of “savings rates” is a bit misleading here — it is not as if large numbers of poor asians are depositing into banks half of their rather small wages so that they can be lent to rich americans, to corrupt them.
It is more like middle eastern and asian governments subsidizing the USA government war spending and tax cuts by underspending domestically and buying USA bonds instead at collector prices.
What the national accounts call “savings” is not necessarily voluntary individual deferral of consumption…
Brad,
I do not intend to waste your valuable time but here is my reasoning.
The real problem is financilization of US economy in the historical context depicted by Brudel, Ferguson etc.
In late Clinton years Larry Summers was instrumental in repealing seperation of commercial and investment banking and exempting OTC derivative contracts from federal regulation.
With the integration of billions of workers to the global supply chain global price of hypothetical worker fell and hypothetical capital increased.
Instead of making necesary adjustments US embarked on a different path by reducing interest rate to 1%. Therefore distorted price of capital. To distort wages of US workers were not easy so policymakers increased their debt load and shifting US workforce to nontradables and hence financialization of US economy.
In case of Europe, Germany restructured its supply chain by integrating Central and Eastern Europe but to avoid increased indebtedness of workers they supplied vendor financing to Club Med and Eastern Europe with implicit guarantee that they assets prices will go up but local currency will appreciate which will provide double gains by using low yielding hard currency financing.The magic word was convergence with western Europe.
Since this convergence promise was broken this is now backstopped by IMF 2.0 .
Up to last year US and EU monetary aggregates in the broadest possible base were growing around 20% per annum since 2003. This flood spilled into commodities and caused massive price distortions.
Is it only coincidence that OPEC and Russian savings glut evaporated as soon as broadest monetary aggregeates stopped growing? How about Japanese savings glut in last three months?
As for Tim Geither i advise you to follow him nakedcapitalism blog.
A civilisation is not one economy but series of economy. Civilisations have always shown reluctance in the adoption of new ideas or models as they were thought to be disturbing threats to the existing balances.
The G20 outcome is to be read as the preservation of the existing economy even when proved wrong.
More debts for bribing more debts.
Actually, I think the G20 summit probably did less for world markets than the amending of the marked to market rules in the USA. Looks like looking into the glass of reality is too painful, hence the reintroduction of bendy mirrors. Hey, the financial crisis has forced many a brave person to relook at honesty, never thought Mr Berry would back down on support for that rule but reality bites.
The posturing by all those world leaders do quite go along with Mr Pesek’s latest article ; would outward bravado really win the day, hmm.
«With the integration of billions of workers to the global supply chain global price of hypothetical worker fell and hypothetical capital increased.
Instead of making necesary adjustments US embarked on a different path by reducing interest rate to 1%. Therefore distorted price of capital.»
That 1% was the consequence rather than the cause of the credit boom, and it was considered by the USA and Chinese elites as the correct response to the readjustement in price between capital and labour: it made it much quicker and easier to export productive capacity and jobs to China.
«To distort wages of US workers were not easy so policymakers increased their debt load and shifting US workforce to nontradables and hence financialization of US economy.»
That was actually a plan to reduce the wages of the US workforce. The idea was that manufacturing was unionized and paid better wages to the lower orders, and services were largely non unionized and paid the lower orders little and the higher orders a lot more.
Therefore the goal was to setup the US (and the UK) as the headquarters of the world, not just of their respective countries; with decently paying productive jobs going to China and India for a drastic downsizing of pay, and then Chinese and Indian companies would come to NYC and London to setup their headquarters and have their shares traded there.
And for a while the Chinese and Indians went along. But they know that they don’t need to pay tribute and fabulous fees to Wall Street or City investment bankers and lawyers; they have hongkong/shanghai and mumbai, and can run their own high valued added financial systems without sending the cream on the top to NYC or London.
Ted Truman had written about the possibility of 5%, or at most 10% of the traidtional industrial countries stake being re distributed. The SDR allocation has been agreed on with absolutely no change in the IMF voting shares. In the short term this improves the US external financing position. But the move will artificially strengthen the USD against major world currencies just a little bit more.
There are two roads diverging in the wood for the US.The one less traveled is the one where they gracefully try to become more equitable to other nations; in terms of trying to substitute commerically useful contributions to the rest of the world for the decades long military-diplomatic political domination.
The one more frequently traveled is trying to blame someone else for the profiligacy and incompetence resulting from the dollar hegemony arrangements; denying the reality of the unsustainability of this scheme; and trying to invent new ways to perpetuate the hegemony.
Unfortunately the savings glut formulation is a subset of the latter, a reasoning that places the blame for the neo-colonial international monetary system on the sovereigns that have been acting as de facto US colonies, led by China.
bsetser: ut a rise in the developing world’s savings rate that exceeded the rise in the developing world’s investment rate is a fact. those who argue to the contrary are the ones defending a pre-copernican theory
You do have to be careful about an intellectual “bait and switch.” The fact that the developing world’s investment rate increased for which there isn’t much dispute. The conclusion that this is a bad thing and it caused economic problems in the developed world and we’d all be better if the developing world saved less is highly disputed.
If one uses the term “savings glut” for both, then you end up not thinking, which is a bad thing. That’s why I don’t like the term savings glut.
bsetser: as for Eastern europe, i fully agree that the JPY and CHF and EUR denomianted mortgages were (and are) a big problem.
Which is precisely the reason I think that the Chinese government was wise to resist pressures to float it’s currency. Once you start floating currency people will start playing currency games unless you have the regulatory infrastructure to stop them and if you deep markets in forex derivatives to limit the damage of currency fluctuations.
LifeIsTooShort: Is it just me or is Geithners plan a total “middle finger” to the majority of 300M americans?
It’s just you.
LifeIsTooShort: So Goldman, Morgan, and Citi can use 90+% of taxpayer liabilities to swap Toxic (aka WORTHLESS assets) from 1 bank to the next???
The assets aren’t worthless. The main type of assets that will be bought under the Geither plan are supersenior CDO’s on subprimes. Suppose you have 100 subprime loans. Person A gets the money from the from 20 houses to default. Person B gets the money from the next 20. Person C gets the money from the next 20. And so forth.
The last 20 houses to default are still paying and unless you end up with a great depression situation, they will still keep paying. However, they are extremely cheap because a) it’s not totally clear that their won’t be a depression and b) person C who thought that they would be safe because they are in the middle got burned.
If you have a bank with a large amount of capital, then buying a super senior CDO from someone that just wants out makes sense.
LifeIsTwoShort: Something tells me Geithner knew he wouldn’t be able to get a dime from Congress/Senate, therefore Geithner came up with this scheme so that 300M (majority polite, kind and good individuals) think it’s the “private sector” making the large investments.
He has already gotten $700 billion, but that’s not enough. You are trying to revive a $3-5 trillion dollar securitization market. That means convincing people with money to invest.
LifeIsTwoShort: I’ll be the first person to voice out against this. Although I do admire TG, and I do admire President Obama, and I do think Mr. Setser is an amazing contributor to this board I have to say, on behalf of many Americans that PPIP is unjustified.
1) Geither doesn’t know this, and he is really being sincere with he thinks that the “toxic assets” are worth something. Also the “toxic asset” name is something of a misnomer. When an investment banker talks about “toxic waste” they are talking about equity tranches (the thing that person A holds). Those have died a long, long time ago. The problem right now is that A,B,C have gotten burned so no one is willing to touch D and E, which are still paying.
2) Also you are really starting to see strains in the Democratic coalition that elected Obama. One thing about Obama is that he is generally pro-banking, pro-finance, pro-Wall Street, and pro-markets, much more so than McCain was. This is why I voted for him, and this is also why he got massive amounts of campaign contributions from Wall Street and financial interests.
So what I don’t understand is this notion that Obama is being “misled” by Geithner, Summers, Rubin, and so forth. I’m surprised that so many people are surprised that Obama has made the decisions that he has.
One thing that people have to recognize which is surprising to most people is that Wall Street strongly leans Democratic rather than Republican. The cultural roots of the Republican party are in the midwest and south, and Wall Street really has never bought into the “small government” “laissez-faire capitalism” idea. Also Wall Street tends to favor higher taxes and stronger regulation.
So with the Democrats in power, Wall Street ends up with far, far more influence on economic and financial affairs than it did in the Bush administration. One will note that Obama’s administration has lots and lots of people with financial background, whereas under the Bush administration, until Paulson came in, there was basically no one from Wall Street in a policy making role in the Bush administration.
The other thing is that talking about “the taxpayer” is an idea that Reagan came up with. Most taxes are paid by the rich.
If you think that the bailout will money from “the taxpayer” to “the banks” then buy large amounts of banking stocks, and I really think that if you work out the numbers, you’ll come out ahead. One thing that I like about math and finance is that it cuts through a lot of bullcrap that politicians like to spew out.
Pull out a spreadsheet, figure out the amount of income tax you pay each year, plug in some numbers for how much you think the Geither plan is likely to cost you, and the plug in some other numbers to see how much you can make if you put your 401-K into banking stocks or TARP based mutual funds. Run different scenarios. When I’ve done that I’m finding that people making under $250K come out ahead.
If the financial cleanup requires huge amounts of money from “the taxpayer” but those taxpayers all make up $250,000+, I’m not going to shed any tears. Obama has already pledged to increase taxes on the rich, and if he saves the US economy, he’ll have a blank check to do what he wants.
Also all politicians give the same speech. We are A. Our enemy is B. I am a member of A, so support me to fight B. In this case
A=taxpayers
B=bankers
The trick in politics is to figure out who to put in categories A and B.
Blisex: But talking of “savings rates” is a bit misleading here — it is not as if large numbers of poor asians are depositing into banks half of their rather small wages.
Actually it is that way.
The big reason that Chinese peasants can deposit large amounts of money is because China is socialist, and so most people don’t have to pay rent. That means that the fraction of income that Chinese that is disposible is much higher than Europeans and Americans.
The major expenses that peasants face are health, education, and retirement, those require a large amount of savings.
Blissex: That was actually a plan to reduce the wages of the US workforce. The idea was that manufacturing was unionized and paid better wages to the lower orders, and services were largely non unionized and paid the lower orders little and the higher orders a lot more.
That actually wasn’t and isn’t the plan. It doesn’t make sense for someone in banking to make people poor. If you are banker, you want people to be rich because the richer people are, the more money they have that needs to be managed. Just from a financial point of view, it doesn’t make any sense to make people poor. If you make people poor. they get angry at you, and end up taking everything you have.
Blissex: And for a while the Chinese and Indians went along. But they know that they don’t need to pay tribute and fabulous fees to Wall Street or City investment bankers and lawyers;
China doesn’t mind paying large amounts of money to Wall Street and City investment bankers and lawyers because a large fraction of people on Wall Street are Chinese (like me for example).
Blissex: they have hongkong/shanghai and mumbai, and can run their own high valued added financial systems without sending the cream on the top to NYC or London.
China is in a good position to have financial systems, but there is one problem here. Time zones. In order to do global trading you have to have three financial centers. One in East Asia, one in the Americas, and one in Europe. Unless you can change the way that the earth rotates, you just have to have a financial center somewhere in the Americas and in Europe. If China wants to be a global economic power, then it’s going to have to set up offices in NYC and in London.
Also I doubt that the US is going to lose it’s global advantage for the simple fact that most people in China are Chinese. Most people in the United States are not native Americans. The United States can go out, find the most talented people in the world, and offer green cards and citizenship. You can get American citizenship and still be Chinese.
China is going to have a much, much harder time doing this. If you are a Latvian, Nigerian or Japanese and you want to make it big in the US, then there is a pretty clear process for doing this. It will be very hard for China to offer Latvians, Nigerians, and Japanese the same sorts of advantages that the US does. This is important in finance, because if Citigroup wants to do business in Latvia, it can very easily find some employee in NYC that speaks Latvian and knows Latvia. It’s much harder for Bank of China to do that.
The US has some fundamental advantages over other countries and some of these are things that won’t change over the next decades. Some of these are sort of silly but important. Like the fact that the US has a coastline with two major oceans whereas China doesn’t.
kaan: With the integration of billions of workers to the global supply chain global price of hypothetical worker fell and hypothetical capital increased.
I don’t think so. Once you had workers in China being part of the global supply chain, they were able to generate vast amounts of new capital, and the price of capital also fell.
kaan: Why people in Eastern Europe bought homes by mortgages in JPY? Because the price of homes were not affordable in local prices.
No. It was because the bank of Japan was offering zero percent interest rates. Using Yen versus local currency doesn’t change the price of the house. It changes the financing terms. It’s also dangerous as hell. Given the number of times that this sort of structure has blown up, I’m shocked that the national regulators didn’t stop it.
kaan: Who guaranted this price distortion?
Bank of Japan because it needed zero interest rates to keep it’s own banks solvent. If the BoJ had increased interest rates, then it would have been impossible to roll over bad loans at which point banks start blowing up.
I doubt that anyone in the BoJ every really thought about the impact on Eastern Europe mortgages, or even if it thought about it, that it cared much.
Blissex: Well, the goal of all the price intervention by IMF and its controlling government (the USA) is to get the nominal prices of asset going up again.
No. The goal is to get trading going again. If markets clear at low prices (which is what is happening with Chinese real estate) this is a good thing. The problem is that there isn’t trading going on at any price.
twofish –
three points
a) china’s household savings rate isn’t any different from india’s, and the usual explanation for its (relatively) high level is the absence of much of a safety net. china’s urban dwellers also do seem to be paying a fair amount of rent. the rise in national savings in china hasn’t come from a rise in household savings.
b) fixed rates in eastern europe were a big source of all the fx denominated mortgages (see the baltics — pegged to the euro, and now with a ton of euro mortgages).
c) tis true that there are strains in the democratic coalition between those from the financial sector and others. and tis true that there are democrats on the street, tho in my experience the street is more republican than the rest of new york. have to say though that my experience wouldn’t support the argument that “Wall Street tends to favor higher taxes and stronger regulation.” i was hearing until august 08 that the greatest risk to the financial system was a regulatory over reaction to modest troubles (not many said the greatest risk was that the financial sector itself was overleveraged and undercapitalized), and i seem to recall the PE and HF barons put up quite a fight to keep the carried interest tax break!
http://boombustblog.com/Reggie-Middleton/898-Financial-Engineering-at-its-Finest.html
Chinese with their worthless reserve.
bsetser: china’s household savings rate isn’t any different from india’s, and the usual explanation for its (relatively) high level is the absence of much of a safety net.
That’s one cause, but the fact that peasants don’t have to pay rent is another one as is the fact that the banks have been stable. Yet another reason for high savings rates is that people started off in 1978 with high savings because under central planning, there really wasn’t that much to buy.
Latin American peasants also have very little safety nets but don’t save because they have to pay land rent and because inflation has wiped out the banks several times in recent memory.
bsetser: china’s urban dwellers also do seem to be paying a fair amount of rent.
Yes but apartment ownership rates are extremely high. Most urban dwellers got an apartment as a “going away present” in the 1990′s when the SOE’s were closed. If you worked for an SOE, you got title to an apartment. It’s also common for factories to provide housing to migrant workers, and this makes the seemingly low wages that factory workers make, a lot less low.
bsetser: The rise in national savings in china hasn’t come from a rise in household savings.
True. It came from the successful reorganization of the state enterprises. Once they were reorganized, the SOE’s started making money left and right. Curiously a lot of the problems that Chinese SOE’s faced are strikingly similar to the ones that General Motors faces.
bsetser: and tis true that there are democrats on the street, tho in my experience the street is more republican than the rest of new york.
NYC or NY State. NYC is very heavily Democratic so that doesn’t mean very much. NY State is much more Republican upstate.
bsetser: have to say though that my experience wouldn’t support the argument that “Wall Street tends to favor higher taxes and stronger regulation.”
My experience has been otherwise, but I mean “Wall Street” in a very limited sense. The two cultures within finance are investment banks and hedge funds. And when I use the term Wall Street, I mean IB (which ironically have largely left Wall Street).
IB’s tend to favor higher taxes and more regulation in part because they make more stable incomes and have armies of lawyers and lobbyists. Whatever regulations get passed, the IB’s will go through it and figure out how to make money off of it.
Hedge funds tend to lean more Republican. Also hedge funds tend to end up in Connecticut and Long Island. Most hedge funds aren’t big enough to afford armies of lobbyists and lawyers, so they tend to be more “no regulation” than “lots of regulations which we can influence and use to make money.”
You can see this in campaign contributions. Democratic candidates consistently get more money both in individual contributions and from PAC’s from the big banks.
bsetser: i was hearing until august 08 that the greatest risk to the financial system was a regulatory over reaction to modest troubles (not many said the greatest risk was that the financial sector itself was overleveraged and undercapitalized).
As lots of things, people often keep their real political views to themselves, and what people really think can be quite different from the official propaganda the party (oopps) I meant corporation puts out.
You can have media relations put out nice glossy campaigns say X, Y, and Z. Meanwhile, you have a trader thinking quietly to themselves “god, what a mess.”
One thing that I find is how the people that seem to worship the market the most, have never had substantial experience in it.
bsetser: and i seem to recall the PE and HF barons put up quite a fight to keep the carried interest tax break!
And in my mind, private equity and hedge funds aren’t “Wall Street”. If you talk to PE and HF’s, they tend to be very proud about not being “Wall Street types.”
This is one reason I find a lot of these conspiracy theories someone off. What they almost invariably get wrong is who is friends with whom and who hates whom. Hedge funds and investment banks can often just barely stand each other because the cultures are so different.
Also there are sometimes very strong differences in culture and political beliefs between people in the executive suite and the vast majority of people who aren’t.
@ 2fish
you seem very confident in the strategy so subsidize the potential tax loss of those with income > 250K by purchasing financials.
am i correct?
well, is there not major risk that in the end the plan may not be enough in thus both the taxpayer and the financials end up in worse shape than we are in today?
my opinion is, and unfortunately speaking have not reached a selling climax or low in the S&P. I think we have 2 more years to go in the bear market.
i do also want to point out that, it is, my understanding that AIG London issued not 1 but trillions in CDO contracts. whats interesting here is it was actually (from my understanding) a NY ibank (big player) that proposed this idea… I’m wondering say even if the taxpayers and banks swap toxic assets the 1T is not enough. the amount of toxic assets issued in CDO’s is so discouraging that by my accounts we are still facing a 8-9T hole.
Of course, i could be wrong, but the Geithner plan may work temporarily, but it really does not address the root of the crisis. bad banks will stay with bad assets….
@Twofish
The data shows that most of the Chinese savings rate does not come from individuals, the savings occurs in businesses and state owned enterprises. Now for most small businesses, it is academic whether the savings are attributed to the business or its owner but for the larger enterprises it implies that those funds can not easily be diverted to consumption; they are more likely invested in new plant and equipment. Also most of the larger companies, because they have large profit margins, are self-financing and less dependent on banks for loans (which explains why the economy did not slow down as the central authorities raised interest rates and reserve requirements.)
Peasants in China for the most part do not have bank accounts. Much of the rural economy is on a cash or barter basis.
LifeIsTwoShort: You seem very confident in the strategy so subsidize the potential tax loss of those with income > 250K by purchasing financials.
That’s not my point. A lot of political rhetoric has been about how awful the plan is because it takes money from “the taxpayer” and gives it to “the banks.” My point is that depending on which taxpayers get hit and how the banks get recapitalized, this may not be a bad thing.
Personally, I think it is quite unfair to recapitalize the banks by increasing taxes on the middle class and the poor. However, to fix the economy, you need massive tax increases on people making more than $1M and moderate tax increases on people making more than $250K, I don’t object to this.
LifeIsTwoShort: well, is there not major risk that in the end the plan may not be enough in thus both the taxpayer and the financials end up in worse shape than we are in today?
Yes. But if you have any better ideas…..
LifeIsTwoShort: i do also want to point out that, it is, my understanding that AIG London issued not 1 but trillions in CDO contracts. whats interesting here is it was actually (from my understanding) a NY ibank (big player) that proposed this idea…
I think you mean CDS contracts. Also CDS contracts are typically states in terms of notional values, which overstate the actual exposures. Also a lot of AIG’s contracts went through Goldman-Sachs, which has let to a lot of conspiracy theories, which I personally don’t believe.
LifeIsTwoShort: Issued in CDS’s is so discouraging that by my accounts we are still facing a 8-9T hole.
You only have to pay a CDS if a company goes bankrupt, and 8-9 trillion is the amount that has to be paid if every company in the United States goes bankrupt.
This is why these assets are so damned hard to value. If the economy stabilizes, then none of the CDS’s get tripped, and so their are no payouts. If things get bad, then CDS’s start getting paid. If things get really, really bad then you start having a chain reaction as one CDS blowups up, it triggers another one, until everything just explodes.
The chain reaction is why AIG was bailed out, and the possibility of a chain reaction is one factor as to why the US government is not that enthusiatic about pushing GM and the banks into anything that would result in a bond default.
LifeIsTwoShort: Of course, i could be wrong, but the Geithner plan may work temporarily, but it really does not address the root of the crisis. bad banks will stay with bad assets….
The root of the crisis is unemployment. Get people jobs, and most of the problems disappear.
Part of the problem that people have is that people assume that there is this big label saying *THIS IS A BAD ASSET*, when this is not the case. Lets look at my mortgage. Right now, it’s a good asset. I pay my bills on time. Now if I lose my job for a year, and run through my savings, then this good asset becomes a bad asset since I’ll likely put food before my mortgage.
Rajesh: The data shows that most of the Chinese savings rate does not come from individuals, the savings occurs in businesses and state owned enterprises.
The current savings rate is 50% households and 50% SOE’s. The amount of household savings has remained constant for the last 30 years, but what happened after 2000 was that you had this burst of SOE savings.
Looking back it now appears that the Chinese banking reforms of the late 1990′s was one of the most successful examples of basic financial restructuring, and it’s something that the US should try to learn from. (And China modeled a lot of the reforms on the US savings loan fix in the 1980′s.)
Rajesh: Now for most small businesses, it is academic whether the savings are attributed to the business or its owner but for the larger enterprises it implies that those funds can not easily be diverted to consumption; they are more likely invested in new plant and equipment.
It’s not that hard. The government can take a dividend and invest in health and education. There are two problems 1) is political which is that the SOE’s don’t want the government to take their money and 2) you need to set things up so that the incentives are right. If the government takes SOE money any time they make a profit then there isn’t much point in making a profit.
Rajesh: Also most of the larger companies, because they have large profit margins, are self-financing and less dependent on banks for loans (which explains why the economy did not slow down as the central authorities raised interest rates and reserve requirements.)
I think that isn’t the big explanation. The government can just order the big companies not to spend money. They are state owned after all, and the government has control over their capital budgets.
The big explanation for why it was hard to cool the Chinese economy I think was that large sectors of the Chinese economy (like exports and construction) were big financed by Western banks. One of the ironies is that the economic downturn hasn’t hit Chinese banks which whose lending to construction was limited, but it has hit Western banks hard.
It’s ironic because for about a decade, Western banks and economists were lecturing Chinese banks on the need to improve risk management and avoid NPL’s, and Chinese banks took those lectures seriously. Western banks didn’t.
Rajesh: Peasants in China for the most part do not have bank accounts. Much of the rural economy is on a cash or barter basis.
This isn’t true, most peasants do have bank accounts. Rural China has a pretty extensive banking network in the form of rural credit cooperatives. A lot of this comes from China’s socialist past. Because the major banks are state-owned, having a bank in a small village is like having a police station or a post office. It’s a sign of state authority (and Japan has a huge postal savings bank).
Most of these rural banks are totally insolvent, but they are there. The fact that rural Chinese are tied into the financial system is what makes China very different from Latin America.
There is a huge problem with rural banks, but it is on the lending side and not on the deposit side. The problem is that because the rural banks are broke, they aren’t lending to rural areas, which is one reason why urban areas are developing so much faster than rural areas.
It’s also why Western banks never got very far in commercial banking. The idea that Western banks had was that they would be so much more efficient, that people would abandon Chinese banks for Western banks. It turns out that at the retail level, people don’t care how efficient your bank is. The care that they have an office around the corner.