Re: Greenspan squawks on trade
If Poole were correct, market forces would drive interest rates on US paper down low enough so that people would be indifferent between US and other sources. But, Poole is talking ideology, not economics. On Sat, Nov 22, 2003 at 10:58:14AM -0800, Eubulides wrote: > Concurrent with AG on the virtues of accounting we also have this from > William Poole -at the St. Louis Fed- earlier this week: > > "Via basic accounting, a country's capital account surplus is equal to its > current account deficit. For simplicity, let's view the current account > deficit as the trade deficit. A common mistake is to treat international > capital flows as though they are passively responding to what is happening > in the trade account. In fact, investors abroad buy U.S. assets not for > the purpose of financing the U.S. trade deficit but because they believe > these assets are sound investments, promising a good combination of safety > and return. On a personal level, every one here has the option of moving > funds abroad, for example through mutual funds that invest in foreign > stocks and bonds. Why is the net capital flow into rather than out of the > United States? The reason is that for most investors the United States is > the capital market of choice. There is no better place in the world to > invest. > > In sum, the United States has created for itself a comparative advantage > in capital markets, and we should not be surprised that investors all over > the world come to buy the product. As investors exploit the opportunities > provided by U.S. financial markets, trade deficits can arise. Thus, my > view is that our current trade deficits are not a cause for alarm because > on the whole they reflect extremely positive forces driving the U.S. > capital account." > http://www.stlouisfed.org/news/speeches/2003/11_19_03.htm > > > So Robert Blecker and the rest of us just shouldn't worry > anymore > > > Ian -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: Greenspan squawks on trade
Concurrent with AG on the virtues of accounting we also have this from William Poole -at the St. Louis Fed- earlier this week: "Via basic accounting, a country's capital account surplus is equal to its current account deficit. For simplicity, let's view the current account deficit as the trade deficit. A common mistake is to treat international capital flows as though they are passively responding to what is happening in the trade account. In fact, investors abroad buy U.S. assets not for the purpose of financing the U.S. trade deficit but because they believe these assets are sound investments, promising a good combination of safety and return. On a personal level, every one here has the option of moving funds abroad, for example through mutual funds that invest in foreign stocks and bonds. Why is the net capital flow into rather than out of the United States? The reason is that for most investors the United States is the capital market of choice. There is no better place in the world to invest. In sum, the United States has created for itself a comparative advantage in capital markets, and we should not be surprised that investors all over the world come to buy the product. As investors exploit the opportunities provided by U.S. financial markets, trade deficits can arise. Thus, my view is that our current trade deficits are not a cause for alarm because on the whole they reflect extremely positive forces driving the U.S. capital account." http://www.stlouisfed.org/news/speeches/2003/11_19_03.htm So Robert Blecker and the rest of us just shouldn't worry anymore Ian
Re: Greenspan squawks on trade
- Original Message - From: "Jurriaan Bendien" <[EMAIL PROTECTED]> > "The buildup or reduction in financial claims among trading countries--that > is, capital flows--are hence exact mirrors of the current account balances. > And just as net trade and current accounts for the world as a whole > necessarily sum to zero, so do net capital flows. Because for any country > the change in net claims against all foreigners cumulates to its current > account balance (abstracting from valuation adjustments), that balance must > also equal the country's domestic saving less its domestic investment." > > In which case there is nothing economists can actually do to optimise the > allocation of scarce resources, except ensure that all impediments, > restrictions and regulation on the operation of free market forces are > removed. This is exactly what the language of 'non-tariff trade barriers' is supposed to operationalize in order to undermine the distinction between regulations and takings. It only remains for the corps. to use the new forums for adjudication in the DSB, Nafta chapter 11 etc. etc. undo the infinite onion of barriers until they come up against the baseline barrier of capital itself as a mode of production. From: FROM POLITICS TO TECHNOCRACY-AND BACK AGAIN: THE FATE OF THE MULTILATERAL TRADING REGIME By Robert Howse http://www.asil.org/ajil/wto6.pdf "...there will always be a rather huge number of possible nontrade or not explicitly trade-based policies that individual member states can implement, which will undermine the value of the negotiated legal disciplines to their trading partners. These policies can take on the aspect of legitimate regulation for noncommercial public purposes. At the same time, they may have the effect of restricting market access, similarly to the explicit trade barriers that member states have legally bound themselves to constrain or remove. Let us say I bind myself not to increase tariffs on steel beyond 15 percent ad valorem. What happens now, if by legislation I turn the steel industry into a domestic monopoly? Or if I set a regulatory standard that foreign competitors in the industry are unlikely to be able to meet, or that it will cost them much more than the domestic industry to meet? Or if I subsidize domestic production of steel? Which of these is a legitimate and acceptable domestic policy, and which is "cheating" or reneging on my trade liberalization commitments in a way that is apt to undermine confidence in the system, if undertaken widely enough? There is no natural or self-evident baseline or rule that can solve this basic dilemma. Individual member states' perceptions of what policies fall on one side of the line and what on the other are going to vary depending on ideology, regulatory traditions, and so forth, all of which generate intuitions about whether someone's regulatory behavior looks like "normal" public policy or, rather, like something that might only be done in the circumstances for protectionist reasons." [snip]
Re: Greenspan squawks on trade
Thanks Ian, That's a brilliant exercise in tautology by Greenspan. But what does he really mean when he says: "Indeed, the example of the fifty states of the United States suggests that, with full flexibility in the movement of labor and capital, adjustments to cross-border imbalances can occur even without an exchange rate adjustment." ? The answer seems to be given in note 6, namely that "if external assets fall short of liabilities for some countries, net external liabilities will grow until they can no longer be effectively serviced. Well short of that point, market prices, interest rates, and exchange rates will slow, and then end, the funding of liability growth." A purer statement of faith in the ability of unfettered market forces to establish equilibrium scarcely seems possible, and this faith does indeed seem to be justified with reference to a globalised "ledger-concept" or accounting concept of equilibrium, which I mentioned before on PEN-L, namely "The buildup or reduction in financial claims among trading countries--that is, capital flows--are hence exact mirrors of the current account balances. And just as net trade and current accounts for the world as a whole necessarily sum to zero, so do net capital flows. Because for any country the change in net claims against all foreigners cumulates to its current account balance (abstracting from valuation adjustments), that balance must also equal the country's domestic saving less its domestic investment." In which case there is nothing economists can actually do to optimise the allocation of scarce resources, except ensure that all impediments, restrictions and regulation on the operation of free market forces are removed. This sounds a bit like the theorem that, since, in an economy based exclusively on free trade, "every economic actor's gain is another economic actor's loss", net world operating surplus, net debts and net capital flows must equal zero at any point in time. Why don't they then ? If Greenspan is correct, all economists can go home now, they've made their point, there is nothing further to say or advice to give - it's all over to the accountants now. The interesting question that remains at the end of this amazing intellectual "tour the force" is what actually happens in the real world when liabilities can no longer be "effectively serviced" ? If holders of liabilities can no longer make payments on liabilities, presumably they would actually go bankrupt, lenders would suffer losses, and then the price-level would be lowered, until bankrupted individuals could go into business again ? Time seems an important variable here, but Greenspan doesn't really discuss it. We remain at the end of the story musing the paradox that while world net capital flows equal to zero, net stocks of capital assets can increase. Isn't capitalism marvellous... J.
Re: Greenspan squawks
Remember, Greenspan's mentor was Ayn Rand. They are both scary people, though I use that last descriptor 'people' loosely. And of course only someone not on the left is allowed to get away with such gobbledygook and obscurantism. Here is a guy who really needs to learn some plain English, but if he used it, then people might actually start to understand what he is going on about. One wonders how he might order a steak or return a Christmas present or something. I think moral hazard with banks lies with the stock holders who invested money in the bank or those who buy the banks' bonds. Not depositors. Now we are supposed to shop around for a retail bank, too. I guess we can rely on internal or hired accountants to give us the truth about a bank's condition, right? Ditto with stock issuing insurance companies. I got to experience the opposite when Kyoei went bankrupt. Kyoei demutualized on the advice of Prudential US (in order to survive global competition we were told). Prudential US then became the controlling shareholder in the demutualized Kyoei. Then Kyoei 'went bankrupt' (was forced to declare bankruptcy by its controlling interest, Prudential) and Prudential US got to sell off Kyoei assets for huge profits while it took suckers like me (policyholders learning about moral hazard) for a ride. The way I look at it, Prudential made millions and stole $5000 dollars from me at the same time. Charles Jannuzi
Re: Greenspan squawks
Greenspan seems to have deepened his insights since he wrote the letter for Ken Keating just before the scam broke. Gene Ian Murray wrote: > Testimony of Chairman Alan Greenspan > Federal deposit insurance reform > Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate > April 23, 2002 > > Chairman Sarbanes, Senator Gramm, it is a pleasure to appear before this Committee > to present the views of the Board of Governors of the Federal Reserve System on > deposit insurance reform. I will be addressing general reform issues, as proposed > by the Federal Deposit Insurance Corporation (FDIC) in the spring of 2001, rather > than any specific bill. Consequently, I will be expressing the broad views of the > Federal Reserve Board on the issues associated with modifications of deposit > insurance. > > At the outset, I should note that last year's FDIC report highlighted the > significant issues and developed an integrated framework for addressing them. In > broad terms, while the Board opposes any increase in coverage, we support the > framework for other reform issues that the FDIC report constructed. > > Benefits and Costs of Deposit Insurance > Deposit insurance was adopted in this country as part of the legislative framework > for limiting the impact of the Great Depression on the public. In the environment > of the record number of bank failures of the time, deposit insurance in this > country was designed mainly to protect the unsophisticated depositor with limited > financial assets from the loss of their modest savings. References were made to the > "rent money" and the initial 1934 limit placed on deposit insurance was $2,500, > promptly doubled to $5,000, a level maintained for the next sixteen years. I should > note that the $5,000 of insurance coverage in 1934, consistent with the original > intent of Congress, is equal to less than $60,000 today, based on the Personal > Consumption Deflator in the GDP accounts. > > Despite its initial quite limited intent, the Congress over the intervening decades > has raised the maximum amount of coverage five times to its current $100,000 level. > The last increase, in 1980, was a more than doubling of the cap level and was > clearly designed to let depository institutions, particularly thrifts, offer an > insured deposit free of the then prevailing interest rate ceilings on such > instruments, which applied only to deposits below $100,000. Insured deposits of > exactly $100,000 thus became fully insured instruments in 1980, but were not > subject to an interest rate ceiling. The efforts of thrifts to use $100,000 CDs to > stem their liquidity outflows resulting from public withdrawals of smaller > below-market-rate insured deposits led first to an earnings squeeze and an > associated loss of capital and then to a high risk investment strategy that led to > failure after failure. Depositors acquiring the new larger denomination insured > deposits were aware of the plight of the thrifts but unconcerned about the risk > because the principal amount of their $100,000 deposits was fully insured by the > United States government. In this way, the 1980 increase in the deposit insurance > cap to $100,000 exacerbated the fundamental thrift problem associated with > concentration on long-term assets in a high and rising interest rate environment. > Indeed, it significantly increased the taxpayer cost of the bail out of the > bankrupt thrift deposit insurance fund. > > Not withstanding this problematic episode, it is clear that deposit insurance has > played a key--at times even critical--role in achieving the stability in banking > and financial markets that has characterized the past almost seventy years. Deposit > insurance, combined with other components of our banking safety net (the Federal > Reserve's discount window and payment system guarantees) has meant that periods of > financial stress are no longer characterized by depositor runs on banks and > thrifts. Quite the opposite: Asset holders now seek out deposits--both insured and > uninsured--as safe havens when they have strong doubts about other financial > assets. > > Looking beyond the contribution of deposit insurance to overall financial > stability, we should not minimize the security it has brought to millions of > households and small businesses. Deposit insurance has provided a safe and secure > place for those households and small businesses with relatively modest amounts of > financial assets to hold their transaction and other balances. > > These benefits of deposit insurance, as significant as they are, have not come > without cost. The very same process that has ended deposit runs has made insured > depositors--as in the 1980s with insolvent, risky thrifts--largely indifferent to > the risks taken by their depository institutions because their funds are not at > risk if their institution is unable to meet its obligations. As a result, the > market discipline to control risks that
