The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘crisis

The Real Cause of the Financial Crisis | Global Labour Supply Shifts


Over at Econbrowser Menzie highlights this new paper from two Profs, and someone from the NY Fed (no title). It closes the loop for me on something thats been bothering me about economists and the financial crisis. The debate about the cause of the crisis vacillates between Greenspan and loose credit, versus, global imbalances and Chinese who save too much. Neither of these resonate much, appear as reactions to a situation, and are therefore more symptomatic than causal.

From the abstract to Why are we in a recession? The Financial Crisis is the Symptom not the Disease!, by Ravi Jagannathan, Mudit Kapoor, and Ernst Schaumburg:

finance_flows

This paper lays the cause of the crisis on the increased labour supply in developing countries. Now this sounds more like a root cause. Things are no longer manufactured in Pittsburgh, but now China. That labour supply in China is net new to the world. There could be a debate about whether that represents an increase in labour supply, or transfer of labour supply.

In what follows we argue that this huge and rapid increase in developed world’s labor supply, triggered by geo-political events and technological innovations, is the major underlying force that is affecting world events today.2 The inability of existing financial and legal institutions in the US and abroad to cope with the events set off by this force is the reason for the current great recession: The inability of emerging economies to absorb savings through domestic investment and consumption caused by inadequate national financial markets and difficulties in enforcing financial contracts through the legal system; the currency controls motivated by immediate national objectives; the inability of the US economy to adjust to the perverse incentives caused by huge moneys inflow leading to a break down of checks and balances at various financial institutions, set the stage for the great recession. The financial crisis was the first symptom.

In my simplistic interpretation of that, globalised labour supply got ahead of globalised finance. Yes there are international financial markets and products, but to what extent do they factor in the new value transfer from developed to developing countries.

Relevance to Bankwatch:
In any event, I will leave the economic analysis to experts. What matters is the extent that the labour supply shifts are indeed the root cause, because that cause remains in place, and is unresolved. It will not be solved by new bank regulation. Nor can we expect banks to solve it. The instability which results will continue, and that is the reality Banks must operate within.
why are we in a recession labour markets jagannathan090309 (3).pdf

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follow up – root cause of crisis – capital reserves, capital flows:

The end of financial globalization 3.0?

What followed was financial globalization 3.0. Emerging markets heeded Martin Feldstein’s advice and took out an insurance policy against the vagaries of financial globalization.[2] By running current account surpluses, intervening in foreign exchange markets and building up currency reserves Asian and other emerging economies were sustaining export led growth and buying insurance against future financial instability. These policies turned developing markets into net capital exporters to the developed world, mainly to the US. Between 1990 and 1998 – during what I have termed financial globalization 2.0 – emerging and developing economies (according to the IMF classification) were running an average current account deficit of about 1.7% of their GDP. Between 1999 and 2008 – during financial globalization 3.0 – this deficit turned into a surplus of 2.5% of GDP.[3]Just like its predecessor, financial globalization 3.0 seemed a success story for a while, generating financial stability and high rates of economic growth. Yet the accumulation of large war chests of foreign reserves through currency intervention carried negative externalities. The arrangement opened up a Pandora’s box of financial distortions that eventually came to haunt the global economy. The glut of savings from emerging markets has been a key factor in the decline in US and global real-long term interest rates – despite the parallel decline in US savings.[4] Lower interest rates in turn have enabled American households to increase consumption levels and worsened the imbalance between savings and investment. And because foreign savings were predominantly channeled through government (or central bank) hands into safe assets such as treasuries, private investors turned elsewhere to look for higher yields. This led to a more general re-pricing of financial risks and unleashed the ingenuity of financial engineers to develop new financial products for the low interest rate world – such as securitized debt instruments.[5]

Written by Colin Henderson

October 13, 2009 at 00:59

Concern over banks and ‘dark pools’ reaches G20


A new concern has arisen over the growth of ‘dark pools’ or private unregulated trading exchanges, where banks and large investors are trading derivatives off balance sheet. IT is significant enough to have come to the attention of this weeks G20.

Exchanges issue warning on spread of ‘dark pools’ | ft.com

The world’s stock and derivatives exchanges on Tuesday warned the Group of 20 leaders that the continued “proper functioning” of their markets could not be taken for granted because of a proliferation of alternative trading venues such as “dark pools”.

This is relevant because the near $ 1 trillion in worldwide derivatives remain a risk to some banks’ stability and survival. One company which failed because of derivative exposure was Lehman Brothers last September, and fear of another was part of that which brought us to the ‘too big to fail’ problem.

Written by Colin Henderson

September 23, 2009 at 16:03

Financial markets did not detect the deterioration of structural productivity trends in the early 2000s early enough


A fascinating analysis of economic conditions prior to 2007, sugesting that dropping productivity and the concurrent increase in asset prices contributed at least in part to the economic crisis, yet was not picked up by the market.

Productivity and the crisis: Revisiting the fundamentals | Vox

Most narratives of the crisis start with problems in the financial sector that then spilled over into the real economy. This column looks at the real side first and shows that labour productivity growth declined significantly in the years prior to the crisis, particularly in the US construction sector. Financial markets may have failed in that they didn’t detect the deterioration of structural productivity trends in the early 2000s.

Written by Colin Henderson

August 14, 2009 at 15:29

Posted in economy

Tagged with , ,

Countries that are least affected by the Economic Crisis


An interesting survey of business reaction to the crisis, and which countries are least impacted.  Full ranking follows the map.  This explains a lot in terms of peoples reactions.

Time will tell if this reaction remains constant, and what were the contributors to and rivers of this reaction.

worldmap

Countries that are Least Affected by Recession | digital inspiration

The data is based on the results of a business confidence survey that was done on international business people of 24 nations to identify which countries they believe are surviving the crisis the best.

Researched by Nobuyo Henderson

ranks

Written by Colin Henderson

May 31, 2009 at 21:11

Herd mentality and crisis – reaction exceeds reality


This is not a good headline.

The same herd mentality that featured in the credit crisis seeks new outlets all the time.  More on this later based on a paper from of all places the Bank of England.

Just how bad is it, and are we (the world) over reacting.

Swine flu spread points to global pandemic | FT

Written by Colin Henderson

April 29, 2009 at 00:16

Posted in Uncategorized

Tagged with ,

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