No end to culprits

Martin Wolf has a nice account, appropriately titled "Asia's revenge," of how Asian surpluses played a key role in setting off the crisis.  It ends thus:

The crisis demonstrates that the world has been unable to combine liberalised capital markets with a reasonable degree of financial stability. A particular problem has been the tendency for large net capital flows and associated current account and domestic financial balances to generate huge crises. This is the biggest of them all.

Lessons must be learnt. But those should not just be about the regulation of the financial sector. Nor should they be only about monetary policy. They must be about how liberalised finance can be made to support the global economy rather than destabilise it.

This is no little local difficulty. It raises the deepest questions about the way forward for our integrated world economy. The learning must start now.

I couldn't agree more. 

But I think it is somewhat misleading to lay the blame for the crisis on global macroeconomic imbalances.  What causes a managable unwinding problem to turn into full-fledged crisis is not any net imbalance between saving and investment in Asia--or any corresponding current account deficit in the U.S.--but the gross amounts of indebtedness involved.  The problem in short is leverage, not a saving glut. That in turn is created by finance, not by macroeconomic imbalances or policies.  

Comments

[William]

"not by macroeconomic imbalances or policies."

What about Greenspanism? Weren't the low interest rates he maintained and promoted partly responsible for encouraging the (by definition) unsustainable housing bubble and the excessive leverage it created in investment banks', hedge funds', pension funds' and insurance companies' balance sheets?

[livingston]

"The problem in short is leverage, not a saving glut. That in turn is created by finance, not by macroeconomic imbalances or policies." TRUE. But Finance and regulatory policies facilitate the increase in leverage. If the CDO financial apparatus didn't exist, the funds flow would have gone into the US banking system...The consequences may not have been as drastic and garev

[Paul Carson]

In as much as the Chinese government aided and abetted financial operators in the US from not paying the price of our profligacy and loose money - by saving us from the inflation that should've been ours in 2004-2006, they have also added to the bubble by feeding us more bubble gum.

I'm not for China bashing - but it the housing and consumption bubble in the US was known to be unsustainable for many years. Unfortunately, many economists were explaining the risks away because they hadn't become manifest till now. Now we'll all learn more post facto.

[Per Kurowski]

Martin Wolf quotes Carmen Reinhart and Kenneth Rogoff saying “Over a trillion dollars was channelled into the subprime mortgage markets, which is comprised of the poorest and least creditworthy borrowers within the US”, which is of course true. But Wolf does not even pose and less tries to answer the most natural and most important question of… How come they did that?

The answer is that in this case there was the presence of an officially endorsed father figure of an expert in risks, namely the credit rating agencies that assured them all that the market was AAA.

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I think most analysts either completely overlook or underestimate a potentially strong factor to the current economic crises. For any observer who looked into the incidence and depth of the crises, it is western advanced economies that are being hit harder. This is not because of the decoupling thesis that claims other economies to be less affected. It is rather an indication of the fact that the structural balance in the world economy is changing. It is time to accept that new winners are emerging from the East.

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