Brad Setser

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Cross border flows, with a bit of macroeconomics

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Better late than never …

by Brad Setser

A lot happened this year. And an awful lot happened in the last few months, even setting the US Presidential election aside.

— The US experienced its worst financial crisis since the Depression. The Fed dramatically expanded its balance sheet, becoming the world’s lender of last resort and the United States’ lender of almost every resort.
— Capital flows to the emerging world reversed. Inflows turned to outflows.
— High carry currencies tumbled. So did the pound. The dollar rallied even as the US financial system teetered on the edge of collapse, then slid as the Fed cut rates to zero.
— Global trade, and I would guess global economic activity, started to contract. Just look at fall in Japan’s exports in November …
— Oil prices fell. A lot. Several oil-exporters that were on top of the world with oil at $145 are now looking at serious financial trouble.

It consequently isn’t a surprise that America started to think about the holiday festivities a bit later than usual. That isn’t just a conjecture either. My colleagues at the CFR’s Geoeconomics Center compared Google searches for “Santa” to Google searches for “foreclosures.” It turns out that Santa overlook foreclosures a bit later than normal. And it took even longer for Santa to overtake foreclosures in those parts of the country where home prices have gone down the most. Do look at the chart.

Never fear. The housing grinch didn’t quite steal Christmas. Santa eventually won out, even in those parts of the US with the biggest fall in home prices.

To celebrate, I’ll be taking a few days off.

Happy Holidays to all. And, if it fits, Merry Christmas.

Monday’s sad economics and finance blog news

by Brad Setser

Tanta proved that deep knowledge and passion could give life to any topic, even one that might seem dry. No one made the details of mortgage origination and securitization more compelling. The obvious relevance of her work helped. So did the fact that she could really write — no one was better at sustaining a complex (and lengthy) argument over multiple blog posts. But what always stood out to me was her deep sense that we all had a stake in making sure that mortgage securitization was done well, and we all lost when it wasn’t. She cared enough to try to make the part of the world she knew best work a bit better. Her voice will be missed.

A new economic team

by Brad Setser

As Calculated Risk notes, before moving to New York I worked for Mr. Geithner at both the Treasury and the IMF. Mr. Geithner was, by the end of the 1990s, in charge of Treasury’s International Affairs division, so almost everyone who worked there — Tim Duy and Nouriel Roubini to name two — also worked for Mr. Geithner. At the IMF, Mr. Geithner encouraged the IMF to pay more attention to balance sheet vulnerabilities — and helped to push a paper I worked on with a group of talented young IMF economists through the IMF’s internal review process.

It consequently is no surprise that I am thrilled that Mr. Geithner looks to be Obama’s choice for Treasury Secretary. I am also pleased that President-Elect Obama also found a way to pull Dr. Summers — a voracious consumer of economic and financial analysis, including economic and financial blogs — into the administration. The current, severe crisis will provide plenty of work for both. Like Noam Scheiber, I hope that the combination of Dr. Summers’ intellectual creativity and Mr. Geithner’s disciplined analysis and political acumen proves fruitful.

I also suspect that Felix is right. The immediate challenge facing Mr. Geithner and Dr. Summers is finding a way to contain the current financial and economic crisis. Citi is a case in point. But once we emerge from the current crisis, the Treasury and Fed will need to build global consensus on how to regulate too-big-to-fail international banks — one that balances the world’s need for a banking system that lends with the need for banking system that doesn’t take on too much risk in good times, leaving taxpayers with the bill in bad times.

I know from experience that Mr. Geithner puts a great deal of effort into his (relatively infrequent) speeches. Those looking for insight into Mr. Geithner’s world view could do far worse than to start by picking out a few of his major policy addresses over the past few years and tracing the evolution of his thinking.

Back when I worked for Nouriel I often posted detailed commentary on Mr. Geithner’s speeches.

On financial regulation try: Things that keep the President of the New York Fed up at night as well as Felix’s comments on Geithner’s post-Bear testimony.

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Congratulations Dr. Krugman

by Brad Setser

Obviously very well-deserved.

Of course, I am more-than-a-little biased.

A few weeks ago, I was thrilled to find out that this blog was on the reading list of an upper level Princeton course on international finance. So I am even more thrilled to be able to say that both this blog and an IMF working paper that Mark Allen, Nouriel Roubini, Christoph Rosenberg, Christian Keller and I wrote on the balance sheet effects of currency crises are on the reading list of an upper level international finance course taught by a Nobel Laureate!

New look

by Brad Setser

To state the obvious, this blog looks a bit different today than it did last week. It was redesigned as part of a broader redesign of the Council’s web page — and the webpage of the Center for Geoeconomic Studies. Most of the early kinks have been ironed out I hope — but if anything seems off, let me know.

A heads-up

by Brad Setser

If all goes according to plan, my blog will be migrating to later this week. The transition should be pretty seamless — at least that is the goal.

It obviously is a bit of a change for me, after being a part of the RGE site for so long. I am particularly grateful that Nouriel and RGE hosted my blog for the past several months, even after I moved to the Council on Foreign Relations. It also will be a bit of a change for the Council and for the Center for Geoeconomic Studies. I trust that the high quality of comments that has distinguished this blog will continue – and that the comments will remain focused on global economic issues. I’ll have more later in the week.

Borders still matter; “the world isn’t as flat as it used to be”

by Brad Setser

On Monday, Bob Davis of the Wall Street Journal argued that the world isn’t flat, or at least it “isn’t as flat as it used to be.” National borders matter more. Barriers to the free flow of goods – oil as well as grain – are rising. Barriers to the free flow of capital too.

He is right. I actually think he didn’t push his thesis as far as it could be pushed.

Consider energy. Most oil exporters sell their oil abroad for a higher price than they sell their oil domestically. That means that the same good has one price domestically and another price internationally. It isn’t hard to see why they have adopted this strategy: if opening up to trade raises export prices, it can leave those who consume the country’s main export worse off. Only exporting what cannot be sold domestically is one way of mitigating that effect. And for most of the oil exporters, it is one (small) way of sharing the bounty that comes from the country’s resource wealth.

This isn’t new. Saudi Arabia and Russia have long sold oil domestically at a lower price than internationally. What is new is that a host of food exporters are adopting a similar policy.

Argentina was perhaps the first. After its devaluation it taxed its agricultural exports – that was a way of raising revenue, but also a way of keeping food cheap domestically. As global prices have increased, Argentina has stepped up its restrictions on say beef exports – helping to keep Argentina’s national food affordable domestically.

Argentina’s farmers aren’t happy. They prefer selling for a higher price abroad than selling for a lower price domestically.

But with food prices rising, more and more countries seem to be adopting the same policies for their rice and wheat that Saudi Arabia and Russia have adopted for their oil. They only export what cannot be sold domestically at a price well below the world market price. That helps domestic consumers at the expense of domestic producers.

It also is a way – per Rodrik (“if you are Thailand or Argentina, where other goods are scarce relative to food, freer trade means higher relative prices of food, not lower”) — of assuring that the consumers in a food exporting country aren’t made worse off by trade.
Actually, in the current case, it is more a way of assuring that consumers in exporting countries aren’t made worse off from a shock to the global terms of trade that dramatically increased the global price of a commodity. But the principle is the same.

Such policies have produced a more fragmented world. Beef is cheaper in Argentina than in the rest of world. Rice is cheaper in rice-exporting economies than many rice-importing economies. Oil is cheaper in oil-exporting economies. And so on.

Then throw in the subsidies that many oil and food consumers have adopted to mitigate the impact of higher oil prices. China sells oil domestically at a price below the world market price. The Saudis are subsidizing food imports. That implies that the same good sells for a different price in “importing” countries – not just for a different price in importing and exporting countries.

For all the calls to adopt a coordinated response that guarantees that exporters won’t take steps — like taxing exports — that hurt the importers as well discouraging increased production in the exporting economy, my guess is that the food crisis will produce more government intervention in the market, not less.

Put it this way: after seeing various food exporting countries take policy steps that would reduce their countries’ profits from exporting to keep domestic prices low, is China’s government more or less likely to trust the market to deliver the resources the Chinese economy needs for its ongoing growth? Or will China conclude that it needs to invest and exercise some control in the production of the resources if it wants to guarantee the stability of its supplies?

Then there are capital flows. Davis highlights the growing presence of sovereign wealth funds in global markets and — – citing a forthcoming Council on Foreign Relations report by David Marchick and Matthew Slaughter — the possibility that the US and Europe will respond to the rise of state investors by stepping back from their existing, fairly liberal, policies for inward investment. He also notes that many countries with sovereign funds looking abroad limit investment in their own economies. China is a case in point.

Here I don’t think Davis goes far enough.

Sovereign wealth funds are a lot smaller than central banks. Their assets aren’t growing anywhere near as fast. The overall increase in the presence of the world’s governments in financial markets is much broader and deeper than an analysis that focuses on just sovereign funds would suggest.


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Inequality in America

by Brad Setser

Unions in the American manufacturing sector used to have the bargaining power to secure a middle class wage for their members. Not any more. And no one else – apart from corporate CEOs, hedge fund managers and star athletes – seems to have all that much bargaining power either.

The chart that accompanies Justin Lahart and Kelly Evan’s report on voter angst in Pennsylvania is worth the price of the Saturday Wall Street Journal. It isn’t (yet?) available online; for some reason it isn’t part of the graphics package that accompanies the online story. It shows the enormous gulf between the income of the top 0.1% of the income distribution and the rest of the population. It also shows that family income, adjusted for inflation, has fallen by 4% for the bottom 90% of the population while rising 22.2% among the top .01% (all parts of the top one percent saw income gains greater than 5%, but the gains were biggest at the top. The graphic I liked is based on the Piketty/ Saez data, and the income calculations exclude capital gains.

UPDATE: the key graph can be found here; hat tip to an anonymous contributor.

I am not sure than Makiw’s explanation – a fall-off in educational achievement and slower growth in the supply of highly-skilled workers – is a sufficient. The top 5% of the American families are all reasonably well-educated. But even among the 5%, almost all the income gains have been concentrated at the top. A fall-off in educational achievement can perhaps explain why the real income of the top 10% of American families is rising (a bit) while the income of the bottom 90% isn’t. But it cannot explain increasingly inequality among those at the top.

It isn’t that hard to see why so many Americans think the US is on the wrong track. Most Americans didn’t benefit from the expansion of the past few years. And now the economy isn’t expanding.

It also isn’t hard to see why public support for “trade” has eroded dramatically, despite the Bush Administration’s ongoing rhetorical critique of “economic isolationism.”

The Doha round has stalled. Trade hasn’t. China’s exports increased from under $250 billion in 2000 to $1220 billion in 2008. It isn’t clear that increased trade with low-wage countries has contributed to lower wages for less-skilled workers in the US. Krugman didn’t find a strong link. But increased access to cheap goods clearly didn’t keep family income – adjusted for inflation and excluding capital gains — from falling for 90% of American families. The impact of globalization on prices isn’t all that clear: competition for oil has pushed its price up. Cheap oil was a big part of the post-war American lifestyle. Cheap financing from the rest of the world did make it easier for Americans to make up for falling wages by borrowing against their homes. That strategy was never sustainable, and it has clearly run its course.

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