Monday, June 16, 2008

After the flood

The City has got its head in the clouds if it thinks business can go on as usual

The case for tighter regulation of the banks. No question that this is needed in my view. It's certainly a prerequisite for a more stable, and dare I say fairer economy.

Posted by letthemfall @ 12:21 PM (574 views)
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2 thoughts on “After the flood

  • “The debt timebomb is the result of China’s current account surplus being churned through Wall Street and European banks to poor people in the US”. This is Greenspan’s line and it confuses cause and effect. The debt timebomb is the result of the dominance of the dollar, which enables (but does not force) the Fed to ignore inflation, dollar devaluation and deficits and to help out or bail out US banks with cheap money. Dollar dominance means that the monetary discipline imposed on other countries applies far less to the US (if other countries pursue a low interest rate policy it’s because they follow the Fed, often in order to peg their curencies to the dollar). This Fed policy produced the US deficits and, conversely, the Chinese surpluses.

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  • “The debt timebomb was the result of China’s current account surplus being churned through Wall Street and European banks to poor people in the US”. This is Greenspan’s self-justifying line and it confuses cause and effect. The debt timebomb is the result of the dominance of the dollar, which has enabled (but not forced) the Fed to ignore inflation, dollar devaluation and deficits and to pursue a cheap money policy which helps out or bails out US banks. Dollar dominance means that the monetary discipline imposed on other central banks applies far less to the Fed (cheap money in most countries would mean a flight to dollars). If other countries have low interest rates it’s because they followed the Fed, often in order to peg their currencies to the dollar. This Fed policy means big US current account deficits, the converse of which is big Chinese current account surpluses. (Sorry if this post re-appears later – forgot to use my password the first time).

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