As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005. (via Alan Greenspan Says the Federal Reserve Didn’t Cause the Housing Bubble - WSJ.com).
Poor Al!
He can see it slipping away from him. What can he do? Blaming the Asians is good start point. He is not below using Ben Bernanke’s rubbish to save his sagging hide.
Wazza truz!
The truth? You want the truth.
Mea culpa
…the true culprits lie halfway around the world. High-saving Asian households and dollar-hoarding foreign central banks produced a global savings “glut,” which pushed real interest rates into negative territory, in turn stoking the US housing bubble while sending financiers on ever-riskier ventures with borrowed money. Macroeconomic policymakers could have gotten their act together and acted in time to unwind those large and unsustainable current-account imbalances. Then there would not have been so much liquidity sloshing around waiting for an accident to happen. (Dani Rodrik: Who killed Wall Street?).
The Real Culprits …
Ben Bernanke is not even mentioned even once. Bernanke’s printing press and helicopter’s are not mentioned even once. The evasion of Federal Reserve on M3 figures are not mentioned even once. China which has funded the US to the extent of US$2 trillion is not even mentioned once. Japan which has funded the US to the extent of US$1 trillion is ignored. Alan Greenspan is mentioned once.
But Asians countries whose reserves are getting wiped due to dollar depreciation - are instead mentioned as culprits.
Wow. This is a new level in brazen-ness. Keep it up Dani boy.
Blame Bush, Greenspan, Bernanke - Not Just Wall St.
Looked at with 20:20 hindsight, this crisis originated in a macro sense with the US Federal Reserve and the Bush administration. Since the dot.com bubble burst in 2000, and in the aftermath of 9/11/01, the Bush administration ran unprecedented fiscal and current account deficits to finance: bizarre wars, tax cuts and egregious public over-consumption, all fuelled by debt bought by the rest of the world. Such insane profligacy was financed by a massive Fed-blown bubble of liquidity. Estimates of the cumulative excess liquidity bubble blown by the Fed to finance these and other private follies range from $8 trillion to $12 trillion. The US Congress was equally culpable, for letting government borrowing limits expand so elastically. So one should be sceptical of the righteous indignation of posturing politicians. The US administration, Congress and Fed were the three main macro-culprits in blowing the money bubble.(via Percy S Mistry: Blame Bush and Greenspan, not just the bankers).
Percy! If you can see this far …
Percy Mistry, a veteran of the Wall Street and the Western financial system, analysed this rather well. Yet, he cant go further than analysis. His prescriptions have been to say the least disappointing.
Percy, what stops you you from taking that leap of imagination! Why not be bold enough to start working on a non-Western model of global financial structure. Why do you persist with the insane desire that developing world (especially India) should dive headlong into this Dollar-Euro cesspool, which is designed basically to suck out wealth from the poor countries of the world.
Hide the Big Truth
Stiglitz, ex-chief economist of the World Bank, (96-99), resigned one month before his term expired. He published his resignation in the New Republic, portraying himself as a dissident, the champion of the Third World, anti-World Bank crusader, etc, etc. Stiglitz brazenly shows himself as a giant, against whom Lawrence Summers and Wolfenson conspired, as he chose “not to circumscribe my thoughts. So I chose to resign.”
How brave!
His targets were (as he chose to describe) “third-rank students from first-rate universities.” Stiglitz knows the media too - well. His article in New Republic, his interview in Financial Express were all excellent ploys to build his reputation. And after all this media management, he did get a Nobel Prize.
And after gaining our confidence, he slips in the Big Lie! Pushing the case for the Big Stimulus, being paid for by the American taxpayer (BIG-Godzilla-Sized lie) is something that Big Business in America desperately needs (small truth) to survive. The Chinese and Japanese are footing this bill (The Big Truth) - as also are Russians, Indians and ASEAN countries (A Medium-To-Big Truth).
To his credit, what Stiglitz has done is tell us a lot of little things - little known and little truths about little things.
We have been told the truth …
The two people who have told us the ‘truth’ are Ben Bernanke and Lawrence Summers. Ben Bernake announced to the world that he would print money, before the National Economists Club, Washington, D.C. November 21, 2002. On March 23, 2006, Ben Bernake further decided not to tell the world how much money he was printing. Bindaas. No hesitation. They let it all hand out. And then came the coup de grace. He went right ahead exploded a propaganda bomb. He decided to inform the world that the cause of the global finacial crisis was the Asian ‘savings glut.’
And Lawrence Summers described this to the RBI correctly as “balance of financial terror.” In a speech on March 23, 2004, at the Institute for International Economics, Lawrence Summers described the US strategy as a “balance of financial terror”. Again on March 24, 2006, at the Reserve Bank of India lecture, he repeated his message.
These two threw down the gauntlet, and challenged central bankers of the world, seemingly saying, “We are doing this! Stop us if you can! Let us see what you can do about this.” And the central bankers decided to do nothing - except whine, beg, plead and cry.
Readers beware
And that is problem. The economists that the media lionizes, apart from Joseph Stiglitz, like Paul Krugman (Princeton) and Dani Rodrik (Harvard) and Jeffrey Sachs are all cut from the same cloth.
Same difference.
What does this mean
An Indian economist explained this rather well. Suman Bery, writing for a direction towards Toward a robust globalisation, explained,
In a famous speech exactly four years ago, Fed Chairman Bernanke represented the US as responding passively and benignly to the global “savings glut” which had developed following the East Asian crisis of 1997-98.
Even though most closely associated with Chairman Bernanke, this formulation is widely shared by respectable economists and commentators, such as Martin Wolf of the Financial Times, Professor Richard Portes of the London Business School and the Centre for Economic Policy Research, and Professor Max Corden of the University of Melbourne. The task of recycling these imbalances fell on the sophisticated financial systems of the advanced countries. In the event, for a variety of reasons, even they proved unequal to the burden placed upon them.
Thus Spake Ben Bernanke
Remarks by Governor Ben S. Bernanke, Before the National Economists Club, Washington, D.C. November 21, 2002 (ellipsis mine
U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press … that allows it to produce as many U.S. dollars as it wishes at essentially no cost. … …the Fed could find other ways of injecting money into the system–for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities … If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
A terse anouncement by the Federal Reserve Board said,
“On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.
On November 10, 2006 Ben Bernanke justified,
“As I have already suggested, the rapid pace of financial innovation in the United States has been an important reason for the instability of the relationships between monetary aggregates and other macroeconomic variables.”
Ben Bernanke has given ample (and more) indications about what he will do. In fact, more than indications, he was brazen enough to say, what exactly he would do! How can the world blame him now?
The Asian ‘savings glut' was the problem …
Ben Bernanke joins a long list of Western propagandists, who find ‘specious’ ways to blame others for Western problems. His most recent propaganda gem was to blame Asia for a ‘savings glut.’
a satisfying explanation of the recent upward climb of the U.S. current account deficit requires a global perspective that more fully takes into account events outside the United States. To be more specific, I will argue that over the past decade a combination of diverse forces has created a significant increase in the global supply of saving–a global saving glut–which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.
After Ben Bernanke opened the flood gates of such logic with ‘helicopter drop of dollars’ and ‘printing press technology’, and now the ‘savings glut’ - others such ‘economists’ have rushed in to do another tom-tom dance around this logic.
What’s the word for a red neck economist?
A so called economist, weighed in with two bits, Dani Rodrik: Who killed Wall Street?
…the true culprits lie halfway around the world. High-saving Asian households and dollar-hoarding foreign central banks produced a global savings “glut,” which pushed real interest rates into negative territory, in turn stoking the US housing bubble while sending financiers on ever-riskier ventures with borrowed money. Macroeconomic policymakers could have gotten their act together and acted in time to unwind those large and unsustainable current-account imbalances. Then there would not have been so much liquidity sloshing around waiting for an accident to happen.
Let us see .. what this means …
Lawrence Summers (correctly) described the current global financial system as a “balance of financial terror”. Lawrence Summers could not have been more clear than this. In a speech on March 23, 2004, at the Institute for International Economics, Lawrence Summers described the US strategy. Again on March 24, 2006, at the Reserve Bank of India lecture, he repeated his message. In the last 5 years, more than US$10 trillion were printed and the world is awash with dollars. Where did this money go? How was this used?
“Lendings by US commercial banks in the period 2000 to 2004 soared by altogether USD 1,500bn to USD 6,750bn. In the European Monetary Union lending to the private sector by monetary financial institutions (MFI) climbed from roughly EUR 6,200bn end-1999 to not quite EUR 8,700bn at the end of last year.” - Allianz Report, Dresdner Bank.(Links mine)
Running and hiding …
The recipients of this largesse, mainly Western banks made (it was whispered) bad loans worth 300-400 billion dollars. Actual figures coming out now are about 20 times as much - much higher.
The loans story does not end there.
These loans were in turn sold and re-sold, then packaged and mortgaged, derived and contrived - finally ballooning into the ‘sub-prime’ crisis. Are these welfare payouts by another name? Who will pay for this “lending”? US Consumers are not repaying their housing loans.
Some one has to!
And that is the root of the problem. The West is trying to make Asians pay!! And people like Ben Bernanke, Alan Greenspan et al are paid hacks to create a logic by which the West will try and make the poor pay.
Nothing less!
Amazing piece of propaganda!
The entire economic model was about printing money. Helicopter Ben was the first, in his celebrated speech, where he sneeringly (Did I imagine the sneer) explicitly and openly spell out the US ‘printing press’ policy - and the aim to helicopter drop US dollar bills. “Helicopter Ben” was also the first to further push the boundaries by refusing to share M3 figures with the world - with a terse anouncement by the Federal Reserve Board. Of course, I must say, Ben was kind enough to to blame Asia for a ‘savings glut’ - which resulted in this global financial crisis.
All in all, Ben Bernanke, represents a new level of Western brazenness.
Alan Greenspan chimed in by his two-bits ‘the Fed did not cause the housing bubble’ statement.
Well, Chairman Sir! You didn’t do it! Neither did I. He didn’t do it. They didn’t do it. So who did? The Asians, of course.
Eureka! It works …
The US and the World economy is suffering from a surfeit of printed money which was channeled into ’supply side’ economics. The model worked exactly as it should have!
The Chinese ‘worker’ and Indian ‘coolie’ worked his backside off. The American ‘consumer’ bloated up debt - and bought all the goodies. The debt mountain became just way too-oooo wobbly. It crashed. The Chinese (and Japanese, Indians and the Russians) have been left holding these pieces of paper, called American dollars.
The US has been evading transparency by not revealing M3 figures (on dubious grounds), printing money 24x7x365 and creating toxic assets. Now when the muck has hit the fan, they are acting coy.
China was right that the US is now looking after its own - and not bothered about the problems the US has created for other countries. Like this news article shows, India is unlikely to get seriously affected - which is possibly creating complacency in India about what needs to be done.
India - Poised for stagflation (from InfoChange India News & Features development news).
Why has the dollar been falling steadily? Quite simply, because US-based firms have less and less to sell to the world, though the world has a lot to sell to American consumers. America has lost competitiveness in recent decades, largely to China and East Asia. This growing imbalance in world trade (present for over two decades now) has meant a ballooning trade deficit (excess of imports over exports) for the US. It has paid for this by selling US Treasury Bonds (perhaps the most sovereign, reliable financial asset hitherto) to foreigners. Increasingly, however, the realisation has grown that the US is not in a position to redeem its $10 trillion external debt. This is almost tantamount to saying that in order to pay for goods produced by China the US has merely been printing the required quantity of dollars. Clearly, this is not a sustainable state of affairs.
The World Full Of Kojaks
The 10 trillion dollar external debt is most likely a conservative figure. It is possibly two-or three times that much. Internal debt is of course another matter. The cost of refloating the US financial system is another US$5 trillion.
So, what figure are we talking about - US$50 trillion? Take that and try digesting it. The only way, this can happen if the world is asked to take a massive haircut. In fact, we may have to become Kojaks for the next 20-30 years.
For the truth shall set you free …
The current crisis happened for one simple reason - the US printed too much money, during Alan Greenspan’s tenure - and later Ben Bernanke started hiding these figures. That is all.
The US is bankrupt. Effete, decadent and declining. Finito. Completo. Terminato. Endlich. Eindig. ändlig.
The Emperor has no clothes at all.
The (Western) Need For Vengeance
They hadn’t suffered yet but were preparing to, and they were perplexed by their inability to figure out who had the idea for this game. “If I knew more I could find someone to blame,” said Linda Burke, a 57-year-old service consultant at AT&T Inc. in Atlanta, speaking, no doubt, for the American people. (via Let’s start by finding some people to behead - Money Matters - livemint.com).
The Earlier Collapses
During the tech meltdown, it was Bernie Ebers (Worldcom) and the Enron guys who were made the fall guys. In the 1989, it was Mike Millken. But how about indicting Alan Greenspan and Ben Bernake?
These ‘incidents’ also talk about the a Western need for vengeance. Or am I reading too much into these posts!
Another Article
“The scale of this problem has been unprecedented and I expect the response will be, too,” said Robert Mintz, a former federal prosecutor and now a partner at the law firm McCarter and English. Someone is going to have to pay for sending the financial world into a panic and wiping out the savings of millions. (The hunt begins to punish the culprits - Times Online).
Big oil ... Big story
What’s being trotted out …Francisco Blanch, the Merrill Lynch & Co. analyst who called the $147.27 record crude-oil price nearly on the nose, sent markets into a tailspin with his forecast that the next move may be back to $25 a barrel in 2009. Such relief for consumers may be short-lived once the global recession ends, he said.
“If we reignite economic growth to a very fast level, we will have a shortage of energy again,” said the 35-year-old head of global commodity research at Merrill Lynch in London. Oil may rise to $150 in two or three years, said Blanch. World growth will reach 2.2 percent next year and rise to 4.8 percent by 2011, according to the International Monetary Fund. (via Bloomberg.com: Exclusive).
it was largely due to the surging middle class in India and China
Cant be true. India and China are still too small and consume too little of oil., still. India produces 30% of its own oil - and another 50% is tied up with long term supplies. The last 20% of this is tied to spot markets - which is where the oil prices yo-yoed.
it was price fixing by the oil companies
For how much and how long … They no longer have the power or the reach to do that - the way they did earlier. Oil production, supplies and trading is now controlled by State Oil companies of OPEC, Russia, Norway and para-State Oil companies like BP. For them to do this for such a long time was not possible
others said the Enron loophole was largely to blame for high oil prices
How much difference can regulators make … ‘Irrational exuberance’ did result in a few contracts - but they would have vaporised in a jiffy, with the coming of settlements. Further I would draw attention that all these theories came from the Governments (US, Saudi, etc.) themselves - which immediately disqualifies them (in my mind).
I would draw attention to the following dots - which may paint another picture altogether.
- The biggest shareholder of Citibank is a Saudi prince (HRH Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud (Arabic: الوليد بن طلال بن عبد العزيز آل سعود).
- The housing and mortgage boom ran concurrently with the boom in oil prices.
- Most of the petro dollars were invested back in the US funds
- Many private funds (like Blackstone, Cerberus, etc.) came up on the back of this liquidity.
- The Chinese appetite for dollar Treasuries and debt.
This spike in oil prices was designed by the US and OPEC to ‘suck out’ the excess ‘dollar liquidity’ from the world currency markets - to sustain high dollar exchange rates, to sustain the dollar hegemony. Since very few people were involved, the operation continued.
If you notice, every few months, there would be a supply disruption - like a fire on a rig, a boat would crash into a rig, a pipeline would undergo maintenance, etc. Not to forget the Iraq War, the Afghan War, the 9/11, etc.
All this was done to prolong the spike. As this situation, ground into an impossibly high bubble, it crashed. Likely architects - Citibank, Alan Greenspan, Ben Bernanke, OPEC, and of course, our favorite, George W Bush.
Francisco Blanch, the Merrill Lynch & Co. analyst who called the $147.27 record crude-oil price nearly on the nose, sent markets into a tailspin with his forecast that the next move may be back to $25 a barrel in 2009. Such relief for consumers may be short-lived once the global recession ends, he said.
“If we reignite economic growth to a very fast level, we will have a shortage of energy again,” said the 35-year-old head of global commodity research at Merrill Lynch in London. Oil may rise to $150 in two or three years, said Blanch. World growth will reach 2.2 percent next year and rise to 4.8 percent by 2011, according to the International Monetary Fund. (via Bloomberg.com: Exclusive).
What’s being trotted out …
it was largely due to the surging middle class in India and China
Cant be true. India and China are still too small and consume too little of oil., still. India produces 30% of its own oil - and another 50% is tied up with long term supplies. The last 20% of this is tied to spot markets - which is where the oil prices yo-yoed.
it was price fixing by the oil companies
For how much and how long … They no longer have the power or the reach to do that - the way they did earlier. Oil production, supplies and trading is now controlled by State Oil companies of OPEC, Russia, Norway and para-State Oil companies like BP. For them to do this for such a long time was not possible
others said the Enron loophole was largely to blame for high oil prices
How much difference can regulators make … ‘Irrational exuberance’ did result in a few contracts - but they would have vaporised in a jiffy, with the coming of settlements.
Further I would draw attention that all these theories came from the Governments (US, Saudi, etc.) themselves - which immediately disqualifies them (in my mind).
I would draw attention to the following dots - which may paint another picture altogether.
- The biggest shareholder of Citibank is a Saudi prince (HRH Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud (Arabic: الوليد بن طلال بن عبد العزيز آل سعود).
- The housing and mortgage boom ran concurrently with the boom in oil prices.
- Most of the petro dollars were invested back in the US funds
- Many private funds (like Blackstone, Cerberus, etc.) came up on the back of this liquidity.
- The Chinese appetite for dollar Treasuries and debt.
This spike in oil prices was designed by the US and OPEC to ’suck out’ the excess ‘dollar liquidity’ from the world currency markets - to sustain high dollar exchange rates, to sustain the dollar hegemony. Since very few people were involved, the operation continued.
If you notice, every few months, there would be a supply disruption - like a fire on a rig, a boat would crash into a rig, a pipeline would undergo maintenance, etc. Not to forget the Iraq War, the Afghan War, the 9/11, etc.
All this was done to prolong the spike. As this situation, ground into an impossibly high bubble, it crashed. Likely architects - Citibank, Alan Greenspan, Ben Bernanke, OPEC, and of course, our favorite, George W Bush.
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