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Paulson pushes to blame "savings glut"

by Jerome a Paris Fri Jan 2nd, 2009 at 07:14:10 PM EST

In an interview with the FT:


Paulson says crisis sown by imbalance

The US Treasury Secretary said that in the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters - at a time of low inflation and booming trade and capital flows - put downward pressure on yields and risk spreads everywhere.

This, he said, laid the seeds of a global credit bubble that extended far beyond the US sub-prime mortgage market and has now burst with devastating consequences worldwide.


This argument - already advanced by a number of economists and largely endorsed by Federal Reserve chairman Ben Bernanke - suggests that the roots of the crisis do not simply lie in failures within the financial system.

It also implies that avoiding crises in future will require global macroeconomic co-operation as well as better financial regulation and risk-management.

As the article notes, this theory has been aking the rounds already, most notably thanks to Ben "Helicopter" Bernanke, who has specifically blamed the "savings glut" in countries like China, Japan, Germany and the oil exporters for the deficits in the US and UK (which were "forced" to borrow that excess saving and spend it on consumer goods). So the debt binge is not the fault of the borrowers - they were actually providing a service to the world.

We now see the second part of the strategy to push the blame somewhere else, ie on China and Germany: it's not the borrowers, and it's not the financiers either who are to blame: they were "forced" to deal with the surpluses of the countries that save more than they should, and so much money put in their highly competitive hands brought financial returns down and pushed them to seek riskier pastures to use that money. So they misallocated funds, and blew them, only because they had too much because the stupid Chinene and Saudis just have too much money!

Seriously.

This not only pushes the blame away from the policies of the neolibs (income concentration for the very rich, leading to income stagnation for everybody else, hidden from view by cheap and plentiful debt allowing consumption to continue), it also provides a convenient reason not to re-regulate the financial world. It's NOt the financier' fault, don't blame them! (*)

Sweet.

I expect this concept to be massively pushed in the coming months, with all the accompanying China- and Germany-bashing. The Germany-bashing is already in ful swing, as it includes the added bonus of an Europe.Is.Doomed angle... see all the articles about how Germany is pushing the whole world into a depression by refusing to be bamboozled into a massive spending spree - how Germany diplomacy is failing, and how Merkel's star is fading, and the mocking, snickering tones about the Germans who thought they were being prudent by not joining the fun and now are suffering as much as those that had fun while it lasted.

This is another case of passing the buck and deflecting attention from the core issue that policies over the past 10 years were geared towards the enrichment of the very rich - and the dissimulation of that fact.

(*) just one note: China's and Asia's did conduct mercantilist policies to protect their export-driven model, and they did have as a goal, after the 1998 crisis, to not be caught without reserves again, so they certainly were willing accomplies in the buildup of the imbalances. But they were not the cause of them.

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http://www.dailykos.com/storyonly/2009/1/2/193431/1697/775/679600

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Jan 2nd, 2009 at 07:48:24 PM EST
No doubt I'll be seeing this a lot from the f..wits in the Independent. I do strongly recommend reading Hamish McRae for further updates on how to be Mad Jack McWrong, the wrongest man on the wrong day to make the most completely wrong prediction.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Sat Jan 3rd, 2009 at 09:41:12 AM EST
I predict that the "savings" of the Chinese will disappear just as did that of the citizens of the USSR after the collapse of the empire.

Savings of "money" only means something when the money can be used to buy things. Savings means deferred spending and in the USSR and China there was/is nothing to spend it on.

In both places the currency rates were artificial. In the USSR there was essentially no trade outside of the block, so the false value of the ruble could be maintained.

In modern China the currency is being manipulated to keep exports growing, but the strains are starting to show. About a year ago I predicted that there would be an economic collapse in China and an associated rise in civil unrest.

This is now happening and how it will be dealt with is anybody's guess. Until recently a huge government crackdown would have been the natural response, but the rise of the wealthy class may prevent this. The wealthy need markets both domestic and foreign and putting the country through another "Great Leap Forward" or other such massive social engineering would ruin the emerging capitalist class.

Whatever happens next, it won't be pretty.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sat Jan 3rd, 2009 at 11:53:18 AM EST
Savings of "money" only means something when the money can be used to buy things. Savings means deferred spending and in the USSR and China there was/is nothing to spend it on.

Did you mean to say that the Chinese cannot spend their money because there is nothing to buy, or am I misreading this?

by dahuk (dahuk . hiddenborder @ com) on Mon Jan 5th, 2009 at 01:33:16 PM EST
[ Parent ]
After all, its the collapse of Bretton Woods that ensures that a nation wishing to pursue a stable peg against another currency must either have the cooperation of that nation (as, for example, Germany refused to provide when the Pound was under the pressure that eventually drove it out of the ERM), or must be pegged at a substantial discount.

And nobody can blame China for bringing down Bretton Woods.

China's accumulation of official reserves are a side-effect of the only stable exchange rate policy it can effectively pursue in the context of free for all dirty floats in foreign exchange markets.

Now, one can argue that they are pegged lower than need be, and that this is neo-mercantalism ... but Paulson and his sort were up to very recently very sternly lecturing recalcitrant low-income nations on the necessity of having "savings" and "attracting foreign direct investment" and all the rest of what Paulson and his sort are now criticizing China for successfully doing.

And of course its imbalanced, but its precisely the imbalance that they were insisting on.

And the hypocrisy of Paulson and others of his sort complaining that Germany is engaging in the very same neo-Hooverist policies that they would propose for the US if they thought that the finance sector could survive the strain ... is mind boggling.

Well, at least it would be mind boggling if we were not accustomed to Paulson and his ilk exhibiting extremes of hypocrisy on a regular basis.

And of course, the question of whether to allow big chunks of the productive sector to collapse in pursuit of fiscal rectitude, or to claw off massive chunks of the product of the productive sector to subsidize an unsustainably large finance sector in something like the standard of living to which they have become accustomed ... is a false dichotomy.

We need to mobilize resources to get the productive sector doing something of long term use, and slowly allow the useful bits of the finance sector to recover off the income that they earn from providing services to the finance sector, keeping the finance sector working while allowing deleveraging to occur.

And if there are people who will quit in a huff if their firm is restricted to paying no more than 10x median income as long as they are eating at the public trough, and status games in the contrast between their pay and the pay received by the President and CEO cut them back to a mere $250K ... well, fine. The finance sector has to downsize, and if the biggest egos leave the building, its unlikely to be a long-term detriment.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 3rd, 2009 at 04:08:57 PM EST
that they earn from providing services to the finance sector

that they earn from providing services to the productive sector

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jan 3rd, 2009 at 04:10:11 PM EST
[ Parent ]
The hypocrisy of Paulson and others of his sort complaining that Germany is engaging in the very same neo-Hooverist policies that they would propose for the US if they thought that the finance sector could survive the strain is mind boggling.

Well, at least it would be mind boggling if we were not accustomed to Paulson and his ilk exhibiting extremes of hypocrisy on a regular basis.

We need to mobilize resources to get the productive sector doing something of long term use, and slowly allow the useful bits of the finance sector to recover off the income that they earn from providing services to the productive sector.

And if there are people who will quit in a huff if their firm is restricted to paying no more than 10x median income as long as they are eating at the public trough... well, fine. The finance sector has to downsize, and if the biggest egos leave the building, its unlikely to be a long-term detriment.

This could be sent as an LTE to somewhere...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 3rd, 2009 at 05:19:10 PM EST
[ Parent ]
... I actually expanded it into a blog post ... Sweating Our Way to a Genuine Economic Recovery ... so there's more text to grab. Attribution in an article, blog or other extensive work if expected, but for a LTE, ET folx should feel free to grab and use without attribution any text they think might be handy.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Mon Jan 5th, 2009 at 11:55:33 AM EST
[ Parent ]
Concerning borrowing by the US I came across an strange idea :

There is another potential alternative, although it has never been tried. If the Fed plans to spend tens of billions of dollars buying assets, why not put the money into the system by offering the capital to banks at a negative .5%? The reasoning against this is the the Fed would be paying the banks interest on the money they borrow instead of the tradition model of the banks paying the Fed.

The odd program might have two effects. The first would be to increase bank lending to business and consumers. With the Fed paying interest for bank borrowing, the risks of bank lending would drop. The other by-product is that banks could rebuild their balance sheets damaged by losses from investments like mortgage-backed securities, with capital being underwritten by the Fed.

It's crazy, but it might work.

Douglas A. McIntyre is an editor at 247wallst.com.

What do you think of it ?

by fredouil (fredouil@gmailgmailgmail.com) on Sun Jan 4th, 2009 at 08:21:18 AM EST
It'll put money in the pockets of the banks, sure. But why would it restart lending?

And if it does restart lending, why does it restart mainly the "good" lending, not the scammy lending?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jan 5th, 2009 at 05:31:46 AM EST
[ Parent ]
The risk, of course, is that Banks would use it to buy Treasury Bonds at a nominal interest of 2.5% and pocket the 3% gains ... and sure in the long term interest rates will rise and the market value of those Treasury Bonds will fall, but they don't seem to be big on worrying about the long term in those banks.

If the focus is on building up banks income stream while engaging in lending, the direct route is for the Fed to shift from doing repo loans against finance sector crap to doing repo loans against consumer finance, car loans, and loans to small business.

But then, doing repo loans with finance sector crap was the big idea that Bernanke had that got him the chairmanship of the Fed ... helping out the productive and household sectors of the economy is not something he's shown any interest in doing.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Jan 5th, 2009 at 12:05:36 PM EST
[ Parent ]


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