Thursday, 23 July 2009

Is a Love of Finance the Root of All Evil?

There is a syllogism that has gained currency just as financial markets have been devalued. And it goes something like: (i) finance is dangerous (ii) the economy is in danger (iii) finance must therefore be constrained. I regularly attend conferences and hear a panoply of dirigiste sentiment directed against the financial sector, arguing that not only that financial markets and banks been the root cause of the final crisis but that they must now be bound like Prometheus to a stone. Though such a conclusion is tempting, it may not be quite right.

The critiques are well known: financial markets underpriced risk, created excessive liquidity and leverage, unbundled exotic near-worthless debt instruments and at the limit, often via hedge funds, promised semi-permanent excess returns. All activities that rewarded participants on the upside and ended up having government support on the downside. The argument then is that faced with such a skew in returns, too many resources have been devoted to financial activity. It is said that banks and financial institutions have become too large both in absolute size because they cannot then be allowed to fail without creating systemic risk and relative to the size of the economies they service. Maybe.

Let us rehearse the arguments about why finance matters. Finance allows individuals and firms to disconnect in time and space their abilities to earn and their abilities to spend and hence concentrate on one or other at any particular moment. The advantages of specialisation are clear – everyone can benefit from the greater production of goods and services by allowing agents inter-temporal as well as geographical options to share resources. But we do know that the efficient allocation of funds from savers to borrowers is subject to severe informational constraints and also various temptations to renege: the avoidance of these problems requires significant regulation, institutional capability and investment in reputation-building. These kind of first order problems do not in general sort themselves out and it is possible even to write about the vast sweep of economic development itself in terms of the history of solutions, failed or otherwise, to these types of problems.

So we can expect that alongside the development of financial instruments we will have to re-write the book of rules and regulations every generation or so, as we moved from heavyweight capital controls in the immediate post-war era under Bretton Woods to an era of neo-liberalism running from the late 1970s to about now and hopefully beyond. And so let us not take the initial premise too far in that the problems with the global financial system are best solved by reducing the size of that system because it seems likely that at least some of the problems stem from its incompleteness rather than its dominance. Let me illustrate: it is entirely proper that capital flows from “impatient” countries to “patient” countries and at some real interest rate the deficits of the impatient must equal the surpluses of the patient. Over time the patient countries will then build up claims or assets against the debts of the impatient countries. Now let us suppose that the patient countries become wealthier, say as their productivity levels catch-up, and all this extra wealth is saved, global savings will then initially exceed investment and interest rates will have to fall to clear the global market for savings, encouraging the impatient to become more impatient and increase their overall level of indebtedness.

For impatient read the US and for patient read China. Under this equilibrium real rates are low and capital flows uphill from fast growing to mature economy. The problem here is that the extra savings are all being sent to the impatient, as there are limited vehicles for the patient to invest in their own economy. In a closed economy, the extra income would have to be channelled domestically and domestic growth would be stimulated in order to use the savings. And so by the same token, if there is an inadequate development of savings vehicles in the patient economies then these savings will tend to drive up the prices of existing assets, for example, US Treasuries which will be in short supply. This global excess demand for assets hence drives down real interest rates raising other asset prices in turn, for example housing, equity or real commodities.

It is thus the lack of financial development in emerging economies which arguably lies at the heart of the problem of this financial crisis and not, perversely, the excess of financial development. An example from the most recent IMF Article IV report from October 2006 for China suffices to illustrate the point, which reports that the foreign exchange rate market remains tightly managed, there seems to be little development of bond markets even at maturities of less than one-year and little or now availability of bonds in the 1-10 year maturity range and equity markets seem not to allow firms to access the market. Overall the IMF view was that the “limited role of capital markets in China…reflects the dominance of state banks in intermediation, but these markets are plagued with regulatory and governance problems”. Obviously a report form late 2006 may well be rather out of date but it does clearly illustrate the point about a lack of liquid assets in newly emerging economies at the high watermark period of so-called financial excesses.

So rather than shunning financial market development, global policies ought also to think more about deepening capital markets and encouraging the development of assets across the risk spectrum, particularly in parts of the world where surpluses are being generated. By helping the development of such assets, policy makers will help raise global real rates, help prevent the conditions under which asset price bubbles will develop and also help get various parts of the world onto more sustainable growth paths that are not reliant on the capacious appetites of Western-style consumption alone. And if as a consequence, we become a little more patient and they become a little more impatient, then we have all become a lot closer to each other, which is a rather pleasant thought.

36 comments:

merlemunson said...

小遊戲,情色視訊聊天室,4u成人,pc交友,尋夢園聊天聯盟,玩美女人影音秀,666成人,免費視訊,聊天,情色論壇,視訊,成人文學,成人電影,漫畫貼圖,情色自拍,美女遊戲,情色a片,成人遊戲,上班族聊天室,巨乳,成人論壇,嘟嘟貼圖區,美女寫真,ut聊天室,同志聊天室,色情小遊戲,貼圖區,哈比寬頻成人,嘟嘟成人,玩美女人,視訊交友,自拍貼圖,正妹計時器,情色a片,成人遊戲,上班族聊天室,巨乳,成人論壇,嘟嘟貼圖區,美女寫真,ut聊天室,

簡單 said...

xh美色網s38想看一下激激sex貼片網s383情色大網咖熟女自拍sex免費成人影片情境坊歡愉用品 視訊泳裝秀拓網交友免費成人影片,104免費成人情色文學小說視訊主播脫衣秀gogo2sexplus28論壇aa免費看a 免費影片觀賞一夜情人視訊 微風成人區壞朋友論壇一夜情視訊後宮電影院 色情影片後宮電影院 色情影片成人情色文學a漫性愛免費片貼圖片區h圖h卡通免費線上影片情色遊戲彩虹情人視訊交友網免費聊天交友
免費聊天交友淫淫美女視訊交友
淫淫美女視訊交友淫娃免費視訊聊天室拓網交友視訊聊天室
拓網交友視訊聊天室uthome 影音視訊聊天室
uthome 影音視訊聊天室

friend said...

Habit is a second nature. ........................................

治男治男 said...

很喜歡你的blog哦...加油唷 ........................................

睿玄 said...

IT IS A VERY NICE SUGGESTION, THANK YOU LOTS! ........................................

鍾FeR_Quade0426 said...

笑口常開~~天天開心........................................

家銘 said...

喜樂的心是健康良藥,憂傷的靈使骨枯乾。 ..................................................

祥傑 said...

一時的錯誤不算什麼,錯而不改才是一生中永遠且最大的錯誤...............................................................

FrederickI_Ferre馨儀 said...

tw18 comsex女優meetic交友a片 168交友eros交友ek21交友104速配網成人 影片sex星野亞希露點星野亞西圖片星野亞西資料星野亞西衣服星野亞西開球星野亞西照片星野亞西無名樣式星野亞西 t-shirt星野亞西 t 恤視訊 辣妹視訊 辣妹台灣情kiss色網aa的滿18歲影片情色視訊交友辣妹no3情色cu成人bt入口愛愛一葉情貼影色站85cc免費影片觀看色情影片情色小說自拍aa免費看sex520 net成人小遊戲美女視訊熟女人影片嘟嘟情人色網拓網交友交友聊天找e爵

730A_ngelinaRabideau0 said...

生、死、窮、達,不易其操。 ..................................................

ElwoodK_Rank佳玲 said...

喘口氣,看個文章,謝謝您的格子囉~~..................................................

SadeRa盈君iford0412 said...

不勞而獲的事情,並沒有價值......................................................

吳俊祥 said...

恨一個人,比原諒一個人,更傷力氣。..................................................................

吳思 said...

支持你就對了!

江婷 said...

一個人的價值,應該看他貢獻了什麼,而不是他取得了什麼....................................................................

韋志韋志 said...

與人相處不妨多用眼睛說話,多用嘴巴思考.................................................................

育財育財 said...

人不能像動物一樣活著,而應該追求知識和美德............................................................

溫緯李娟王季 said...

Rome was not built in a day............................................................

賢林 said...

人因夢想而偉大,要堅持自己的理想哦..................................................................

吳婷婷 said...

A bird in hand is worth two in the bush. ..................................................................

吳婷婷 said...

Beauty, unaccompanied by virtue, is as a flower without perfume...................................................................

楊儀卉 said...

河水永遠是相同的,可是每一剎那又都是新的。..................................................

佳皓佳皓 said...

Gather roses while you may...................................................

思恬 said...

不斷的砍伐用的雖是小斧,卻能砍倒最堅硬的橡樹。......................................................

琬安琬安 said...

出遊不拘名勝,有景就是好的..................................................................

賴珈慧賴珈慧 said...

要繼續發好文喔^^加油!.................................[/url]...............

lowe施cole鈺man駿 said...

這個部落格好好好~棒棒棒~~~............................................................

林坤郁 said...

所有的資產,在不被諒解時,都成了負債..................................................................

王辛江淑萍康 said...

死亡是悲哀的,但活得不快樂更悲哀。............................................................

凱許倫 said...

Everyone fastens where there is gain.............................................................

佳陳容 said...

Learning makes life sweet.......................................................................

8468 said...

這不過是滑一跤,並不是死掉而爬不起來了。..................................................

翊翊翊翊張瑜翊翊翊 said...

好的部落格就要和好朋友分享--感謝分享............................................................

淑蕙春蕙春芬 said...

道歉是人類一定必要的禮節..................................................

麗王王珠 said...

真是感人肺腑的文章~~......................................................

惠NorrisBradwell041花 said...

原來天鵝嫁給癩蛤蟆就會生出醜小鴨。。。...........................................................