Felix Salmon

Germany’s beef with QE

Felix Salmon
Nov 9, 2010 16:03 UTC

Dominic Lawson has a good column on the way the rest of the world sees quantitative easing, and in particular German finance minister Wolfgang Schäuble. Two quotes in particular from Schäuble stand out. Here’s the first:

“They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money. The results have been hopeless.”

And here’s the second:

“[Our] successes are not the result of some sort of currency manipulation … The American growth model on the other hand is in a deep crisis. The US lived on borrowed money for too long, inflating its financial sector unnecessarily.”

Essentially what Schäuble is saying here is that we can’t hope to cure America’s deep-seated economic problems with monetary policy. The arguments over QE versus old-fashioned interest-rate cuts are beside the point: both of them try to boost the economy by lowering interest rates and increasing the supply of credit. But we’ve already gone far too far in that direction: America has too much debt, especially in housing. Adding to that pile of debt is only going to make matters worse, and the primary beneficiary is going to be our bloated and overgrown financial sector.

Germany, I think it’s fair to say, has never thought of its central bank as an institution which can or should provide a boost for the economy when times are hard. Yes, if a recession means lower inflation, then interest rates can and should fall, but the job of the central bank is just to make sure that inflation remains low: there’s no secondary mandate to maximize GDP growth or employment.

The result is an economy which has been built, over decades, on tight monetary policy and a strong Deutschmark (and now euro). Growth in such an economy doesn’t come from low interest rates causing a boom in credit and a weakening currency: it comes from creating goods and services which are higher quality than those found anywhere else in the world, and selling them at high prices.

The difference with the U.S. is stark. The Fed, of course, does have that explicit secondary mandate, and what’s more it’s clear from Ben Bernanke’s public statements that he considers himself forced into acting aggressively by the gridlock in Washington and Congress’s failure to provide the fiscal stimulus which is clearly warranted. On top of that, the U.S. is simply too big to carve out a niche as a provider of high-priced, high-quality, manufactured products: its greatest successes have been in the mass market.

Al of this is a recipe for fractiousness at the G20 meeting this week in Seoul. The unity we saw at the London summit in 2009 is a distant memory: no one, now, can even agree on what internationally coordinated action should look like, let alone actually get their respective parliaments to implement it. Which in turn means that G20 national economic policies are increasingly likely to work against each other than constructively with each other. It might well take another full-blown crisis before Germany and the U.S. are on the same page again.


“And just to add, I’m not sure why you think that the level of external debt would be a good measure of fiscal responsibility.”

I don’t personally think that, but the German finance minister seems to think that generic “debt” is a huge problem in the states, but not in Germany. Which makes no sense when you look at the data.

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What is Dealbook?

Felix Salmon
Nov 9, 2010 15:08 UTC

The NYT is putting a lot of effort into pushing the newly-relaunched Dealbook, or Dealb%k as it seems to have become. The site certainly looks very clean, an open-sided design with the same acreage of white space that can be seen in the NYT’s similarly-relaunched op-ed section.

There’s more going on here than a new silly logo. A lot of open questions remain, and I’m holding out a smidgen of hope that if I pose them in public, Andrew Ross Sorkin might embrace his bloggier tendencies and respond in kind.

  1. What’s the difference between Dealbook and Business Day? Dealbook prominently features, on every page, a full masthead of 20 contributors: this is much more branding of individual journalists than the NYT has traditionally gone in for, beyond a few star columnists. Is this the crack finance team, writing for the industry elite rather than a broad national audience? The official NYT press release certainly hints that it is, talking as it does about “the C-Suite audience” and “industry leaders in finance, banking, brokerage, legal and real estate”.
  2. What’s with Dealbook’s print presence? The franchise now has its own page of the NYT’s B section every day, in an arrangement which looks very similar to the WSJ’s Heard on the Street franchise, which has a miserable web presence. Is Dealbook looking to be the NYT equivalent of Heard? And if so, whither the Reuters Breakingviews column which appears earlier in the section? With Dealbook featuring opinionated columns from the likes of Steven Davidoff and Jesse Eisinger — not to mention Sorkin himself — what need is there for Breakingviews as well?
  3. Where are the links? Dealbook’s daily email is popular largely because it features links to a lot of rival publications. And Sorkin is on the record saying that he likes to “aggregate by hand” rather than by algorithm. But the email is impossible to find on the Dealbook website: those links are fit for email, it seems, but not for nytimes.com. The website, in turn, has much less aggregation, and the one nod it makes in that direction — a section called “The Wire” — is indeed entirely automated and features no human curation at all.
  4. How will Dealbook navigate the NYT’s paywall shoals? That Telegraph profile says that Dealbook might “be given an initial reprieve from the paywall” — a hint that Dealbook pageviews might not count towards your NYT quota. Or, possibly, they might be treated in the same way as pages reached from other blogs, or Twitter, or Facebook: they count towards your quota, but they will always display, even if you’ve exceeded your quota of allowable pageviews. I think of it like a foul ball in baseball: it counts towards your tally of strikes, but it’s not going to end your at-bat. That system, of course, would still give people an incentive to avoid Dealbook, since doing so would increase the number of other NYT articles they could read before hitting the paywall. More conceptually, is Dealbook considered a premium product for NYT subscribers, or is it considered an open blog which anybody on the internet is encouraged to visit daily?

I like the idea that the NYT is putting a lot of resources into a financial site which has aspires to become the “Politico of finance” — setting the agenda, breaking news, and aggregating the best of the web. But you can’t be the Politico of anything if you’re behind a paywall — at that point you just become a premium subscription newsletter. So what’s the strategy here? Or is that a closely-held secret to be known only to a handful of elite New York Times Company executives?


I think BreakingViews will survive.. its fed into the Thomson products prominently, so I can get my fill there.

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Felix Salmon
Nov 9, 2010 04:45 UTC

The Oracle/HP feud turns utterly farcical — Reuters

Three great writers take on Facebook: First Aaron Sorkin, then Zadie Smith, now Alexis Madrigal

Action on Social Security: The Urgent Need for Delay — CEPR

Greek FinMin stresses that Greece is “not Ireland” — MNI

America’s biggest retailer regularly calls itself both Walmart and Wal-Mart in the space of the same press release — Economist

Blogging underground secrets into the light — CNet

“Mentioning gold is a good way to get attention, at the cost of having your substantive points ignored” — Economist

One extra text-entry field was costing Expedia $12m a year, until they removed it — Silicon

Very excited to read Khoi’s book, and I’m not even a web designer — Subtraction

Nicaragua Accidentally Invades Costa Rica, Blames Google Maps — TechDirt


An interesting link you might find informative (and a site you mentioned that you liked going to).
Basically information on where we spend money in cities, etc.
I know you like information sites like this so thought you would enjoy!

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QE: Greg Ip answers my questions

Felix Salmon
Nov 8, 2010 22:35 UTC

Are you still confused about quantitative easing, what it is and how it works? I certainly was, and so I asked a genuine expert on the matter — Greg Ip, the author of The Little Book of Economics: How the Economy Works in the Real World — whether he could answer a few questions for me. Greg’s been writing some great blog entries on this subject at the Economist, like the one I linked to this morning, but sometimes you need to take a few steps back to clear up some very basic questions first. Thank you, Greg, for these fantastic answers! If you like them, go buy his book!

FS: Does the Fed print money? If so, how?

GI: Yes, and I’m surprised to see Pragmatic Capitalist dispute this.

It’s true that the Fed is not literally printing the $20 bills that end up in your wallet. As a commenter on your own blog has noted, that’s the job of the Bureau of Printing and Engraving. But money includes both currency in circulation and the reserves that commercial banks keep on deposit at the Fed. By that definition, the Fed is indeed printing it.

Here’s how QE works. The Fed buys a $100 bond from Bank of America. The bond gets added to the Fed’s assets. Bank of America has an account at the Fed. The Fed, with a keystroke, puts a $100 into B of A’s account. Where did the money come from? Thin air. Bank of America can visit its friendly neighborhood Fed branch and withdraw that $100 in the form of bills and coins. So for practical purposes the distinction between currency and reserves is meaningless; the monetary base includes both.

Incidentally, it makes no difference whether the bond belonged to Bank of America, or a customer of Bank of America; the mechanics are identical. When the Fed buys the bond from someone who isn’t a bank (e.g. a primary dealer), the transaction is settled through that person’s bank.

The Fed can also unprint money. Suppose its sells the $100 bond back to Bank of America. It then deducts $100 from B of A’s account at the Fed. The money disappears from existence.

You could argue at a more abstract level that this is not printing money. Normally we treat the Fed as independent of the government. Its liabilities, namely currency and reserves, are therefore not liabilities of the government, like treasury bills and bonds. When the Fed buys a Treasury bond, the liabilities of the Fed (reserves) grow but the liabilities of the government stay the same.

If instead you treat the Fed as an integral part of the federal government and merge their balance sheets, then QE simply takes one liability (a Treasury bond) out of circulation, and replaces it with another (reserves). This is actually a core criticism of QE: that in a liquidity trap, investors don’t really care if they own cash or Treasury bills and replacing one with the other accomplishes nothing.

In the real world I think the two should be, and are, treated separately. The Fed as far as we can tell is acting independently. It doesn’t have to buy Treasury debt; it could theoretically conduct QE by buying private sector or foreign debt.

Is there any difference between QE and the Fed’s normal open market operations, beyond the duration of the assets being bought?

Please allow me a moment of naked self promotion; my book, The Little Book of Economics: How the Economy Works in the Real World provides a layman’s explanation of how both conventional monetary policy and quantitative easing are implemented, on pages 71-72 and 156-161. (It has lots of other cool stuff, too.)

In theory, the two are less different than you’d think, as Ben Bernanke said over the weekend. In both cases, the Fed is buying and selling securities in an attempt to influence interest rates. Under conventional monetary policy, the Fed uses open market operations – buying and selling Treasury debt for holding periods of 14 days or less – to target the Federal funds rate. Since the Federal funds market is so small, the Fed doesn’t have to buy or sell much to get the rate to where it wants. And normally, if it’s targeting, say, a 3% funds rate, it will have to periodically sell, to keep the funds rate from dropping below target, as well as buy to keep the funds rate from rising above target.

Under QE, the Fed shifts its focus to long-term rates from short-term rates, and buys as much debt as it needs to get long term rates down. If it ever gets long-term rates to where it wants, it will stop buying. If it thinks long-term rates have gone too low, it could sell. Since the bond market is so huge the Fed has to buy way more debt than when it’s trying to sway the Fed funds rate.  That’s why its balance sheet has grown so much.

This discussion, however, masks an important practical difference. Under conventional monetary policy the Federal funds rate rises and falls with the supply and demand for reserves. The Fed targets the fed funds rate by buying debt, which adds to reserves, or selling debt, which shrinks reserves. Note that the quantity of debt involved, i.e. assets on the Fed balance sheet, is irrelevant: the Fed is trying to fine-tune the supply of reserves, i.e. its liabilities, to get the Federal funds rate on target.  

It’s just the reverse under QE: the Fed is explicitly targeting the amount of debt, i.e. the asset side of its balance sheet, and the amount of reserves it creates in the process is irrelevant. A lot of people have a monetarist-like conviction that the $1 trillion-plus of excess reserves on the Fed’s balance sheet represent a lake of inflationary gasoline just waiting for a match. My advice is to ignore it. Except when banks are liquidity constrained, reserves aren’t an important determinant of how much they lend; the demand for credit and banks’ own lending standards are far more important. QE will affect the demand for credit by driving down interest rates and the dollar and by driving up asset prices, not through the quantity of reserves.

Interestingly, when the Bank of Japan tried QE a decade ago it used a monetarist framework: it had a target for the quantity of reserves it sought to create which it then hoped banks would lend out, expanding the money supply. It didn’t work. So the Fed deliberately shunned this framework, even trying to supplant the damaged brand of “quantitative easing” with the term “credit easing.” Despite the different terminology, the practical results of the policies is the same: more reserves, bigger central bank balance sheets, lower bond yields.

Is the Fed trying to decrease medium-term interest rates and increase medium-term inflation expectations at the same time? Is that possible?

Monetary policy stimulates demand by lowering the real interest rate – that is, the nominal rate minus expected inflation. It could do this by lowering the nominal interest rate or raising expected inflation. The Fed, by implementing QE and telling us it thinks inflation is too low, is trying to do both. So far, it’s working: since August nominal rates have fallen and expected inflation has risen, so real interest rates are quite low, even negative at shorter terms. It’s conceivable, though, that it could fail: if inflation expectations really take off, then selling by panicked bond investors will overwhelm the Fed’s purchases and drive nominal and perhaps real rates up sharply.

What is a currency war? How would we know if the U.S. were engaging in one?

“Currency war” is one of those phrases that, like “shock and awe” seems destined to leave a bigger mark than the person who coined it (for the record, Guido Mantega, Brazil’s finance minister). It seems to be journalistic short hand for competitive devaluation, a dynamic where every country tries to lower the value of its currency in an effort to get an advantage for its exports over everyone else. Clearly, that’s impossible: currencies are a zero-sum market.

Currency war, or competitive devaluation, had a clearer meaning in the gold standard world where countries had implicitly agreed to keep their exchange rates fixed against each other. Countries that broke ranks by devaluing against gold got an immediate competitive advantage.

In a world of  floating exchange rates, it’s a little less clear. Win Thin of Brown Brothers Harriman says that Switzerland, Japan, Brazil, Mexico, Peru, Korea, Taiwan, and Israel have all intervened, but only to slow the pace of appreciation, not drive their currencies down. More prominently, several countries have tried capital controls to slow the pace of foreign buying of their assets and alleviate upward pressure on their currencies. I don’t think this, as yet, can be equated with currency intervention: it seems to me more a cousin to “macroprudential regulation,” by which central banks deliberately try to tamp down speculative flows in the markets in hopes of heading off a more painful speculative bust later on.

I take a relatively sanguine view of these steps. In their book “The End of Influence,” Stephen Cohen and Brad DeLong make an astute observation about China’s use of an undervalued exchange rate to spur export-led growth. It is, they note, a far less distorting form of industrial policy than subsidies, tariffs and quotas with their attendant corruption and rent-seeking. I feel the same way about the latest round of currency intervention and capital controls: they’re a retreat from the ideal world of perfect capital mobility, but a second best solution if the alternative is naked protectionism.

The U.S., I suppose, could be construed as having declared currency war if it started selling dollars on the open market against other currencies. QE alone doesn’t qualify.

What’s the difference between the Fed’s QE and the BoJ’s unsterilized fx intervention?

First, some Econ 101. When a central bank buys foreign currency, it usually pays for it with domestic currency that it borrows from someone else. Thus, the supply of domestic currency doesn’t change (in the jargon, the impact of intervention on the money supply is “sterilized.”) If, however, a central bank pays for the foreign currency with newly-printed domestic currency, the domestic supply of the currency increases; this is unsterilized intervention.

Buying either bonds or foreign currency with newly printed money are both QE. A monetarist would argue their impact is the same: by increasing the domestic money supply, they ultimately raise the price level and lower the purchasing power of the currency, which should drive down its foreign exchange value. The Swiss National Bank carried out unsterilized purchases of euros with Swiss francs because its domestic bond market was too small for a large QE programme.

In practice, however, the two policies have very different effects, especially by altering expectations. Domestic QE influences what investors think the government wants bond yields to be, while FX intervention does the same for the currency’s value. Not surprisingly, the latter is much more divisive globally.

If every country were to try unsterilized intervention, it would be equivalent to every country devaluing against gold at once: relative exchange rates wouldn’t change but everyone’s price level would rise, pushing down real interest rates. Barry Eichengreen, however, has argued that a more effective and less politically divisive way to achieve the same result would be for the Fed, BOJ and ECB to do domestic QE. It’s noteworthy that after its half-hearted, unsterilized intervention in September, the Bank of Japan has changed tack, accelerating its own QE programme to offset the effect on the yen of the Fed’s QE. “This kind of follow the leader response by central banks is part of the solution and not part of the problem,” Eichengreen says.


Very nice explanation by Ip; kudos for him taking the time to write it and you for posting it, Felix.

A few quibbles:

“if it’s targeting, say, a 3% funds rate, it will have to periodically sell, to keep the funds rate from dropping below target”
Now that the Fed pays interest on reserves, this is not exactly true. The Fed will still wish to reduce reserves from time to time but the rate it pays is an effective floor on the fed funds rate.

“If it ever gets long-term rates to where it wants, it will stop buying.”
That’s OK if the Fed frames its target as a rate, but if it announces a quantity (as it has), it must follow through or it will impair its future ability to influence expectations. Remember, the market has already acted on the announcement.

“This is actually a core criticism of QE: that in a liquidity trap, investors don’t really care if they own cash or Treasury bills”
I think that Ip has not given sufficient consideration to this problem. Although you cannot buy real goods directly with T-bills, in the financial markets they are very close money substitutes because they can be posted as collateral. In the repo market they act much like money. Some people with monetarist inclinations, like Gorton, think that there has been a shortage of this collateral-money over the past decade and interpret AAA ABS paper as privately manufactured collateral, needed to satisfy this excess demand. I am skeptical of this interpretation with respect to past events, but obviously it is a logical possibility that at some point the supply of treasuries could be too small to support the repo market. The effect this would have is hard to predict. On one hand, the repo system is the banking system for large depositors who do not have access to insured banking. It fulfills the same valuable economic function that any other banking system does. Yet perhaps impaired access to the repo system would cause corporations to shed as much cash as possible, either in investments or dividends. That might generate the demand the Fed is hoping for. But maybe uninsured deposits in “too big to fail” banks would be seen as close enough substitutes.

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Disclosing economists’ conflicts

Felix Salmon
Nov 8, 2010 22:02 UTC

Gerald Epstein and Jessica Carrick-Hagenbarth have a 41-page paper out which gets boiled down quite effectively to its title: “Financial Economists, Financial Interests and Dark Corners of the Meltdown: It’s Time to set Ethical Standards for the Economics Profession”.

They took a group of 19 academic financial economists and looked for possible conflicts of interest — board memberships of financial institutions, consultancies, that kind of thing. They conclude:

In this study, we showed that the great majority of two groups of prominent academic financial economists did not disclose their private financial affiliation even when writing pieces on financial reform. This presents a potential conflict of interest. If this pattern prevailed among academic financial economists more broadly this, in our view, would represent an even greater social problem. Academic economists serve as experts in the media, molding public opinion. They are also important players in government policy. If those that are creating the culture around financial regulation as well as influencing policy at the government level for financial reform also have a significant, if hidden, conflict of interest, our public is not likely to be well-served.

The findings understate the severity of the situation in the real world, where most consultancies and substantially all paid speeches are kept secret. Financial economists tend to make a lot of money, most of it from the financial sector rather than their putative employers, and they’re very unlikely to disclose their income or their conflicts in public.

Paul Krugman is an interesting case in point:

Before I went to work for the NY Times I did a lot of paid speaking, mainly to investment bank conferences outside the US… My fee for overseas talks was usually $40-50K.

I do very little paid speaking now, and no consulting, because the New York Times has quite strict rules: basically I can only get paid for speaking to nonprofits that have no possible interest in influencing the content of the column. It’s a good rule – read Eric Alterman’s book “Sound and Fury” to see how speaking fees can corrupt pundits – though it meant that I took a substantial income cut to work for the Times.

Krugman is clearly comfortable with the idea that speaking fees can corrupt pundits, and thinks it’s a good idea that NYT columnists don’t accept them. Yet at the same time he had no problem accepting such fees as an economist, and I’m quite sure he never disclosed those fees when he was writing academic papers on financial subjects.

It seems obvious that when you’re regularly making significantly more than the median national annual personal income from giving a single speech, you’re prone to being captured by the people paying you all that money. And the secrecy makes things much worse. I once mentioned in passing on my blog a consultancy gig which I happened to know about and didn’t think was particularly secret. The consultant in question phoned me up extremely distraught, fearful that the employer, a hedge fund, would read my post and react to it with a whole parade of nasty possible actions. There’s no good reason for such secrecy on either the employer or the employee side — unless, of course, there’s something ethically suspect about the arrangement in the first place.

I don’t know what the solution to this problem is, but clearly more disclosure would be a very good idea. But it’s not going to happen: there’s too much money riding on the continuation of the status quo.

(Via Folbre)


Steve – then Felix needs to be a whole lot clearer. Can you see how this quote about Krugman (especially the second half) might lead to my confusion?

“Yet at the same time he had no problem accepting such fees as an economist, and I’m quite sure he never disclosed those fees when he was writing academic papers on financial subjects.”

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Why you can’t buy a unique house

Felix Salmon
Nov 8, 2010 21:12 UTC

It’s hard to sell a circular house: over the past year, the palindrome-friendly realtors at Weichert have tried and failed to move 300 Farmington Road at $524,425; $499,994; and most recently $449,944. But it’s still on the market, and the banks are to blame. Mae Ngai and John New wanted the house, had the 20% down-payment ready, and were pre-qualified for a loan. But it wasn’t enough for the lenders:

Two mortgage companies turned us down. The first did so after its investors – big banks with household names – rejected our application. The second mortgage company’s internal underwriters also rejected us. Their reasons were the same: The home, a customized modular house of internationally acclaimed design, built in 1989, is . . . round.

Being “unusual” or “unique,” it was deemed “not marketable.” Despite its evident worth and multiple independent appraisals, the lenders said they could not assign a value to the house because there were no comparable properties. And, with no “value,” there was insufficient collateral for a loan.

Ngai and New say, reasonably enough, that “there is a certain perversity about making a house unbuyable, even to two eager would-be purchasers, for fear of it being unsellable in the future”.

More generally, this shows a mortgage system broken in all manner of different ways.

For one thing, everybody is far too rule-bound, still. If a lender is worried about the difficulties involved in selling a round house, then it should be able to ask for a higher downpayment, or require a slightly higher mortgage rate, to make up for the extra risk. But no one seems set up to be able to do that.

What’s more, unique houses have an upside as well as a downside, from the point of view of a big lender: they’re less correlated to the market as a whole. If you’re trying to sell a standard suburban tract home which is to all intents and purposes identical to the 152 other suburban tract homes on the market, you’re in trouble. The nightmare for a mortgage lender is a property-market crash with prices plunging and far more properties coming onto the market than there are qualified buyers for them.

The other nightmare for mortgage lenders, of course, is the idea that homeowners might simply walk away from their underwater property, often because it makes perfect rational sense to do so when you can rent something identical or better for less money than you’re paying on your mortgage.

Unique homes, by contrast, are the kind of things which can prompt bidding wars in the midst of a property crunch — they’re not nearly as susceptible to the whims of the broader market. And when they’re sold, they’re nearly always sold to people who love them and have a strong emotional connection to them, which makes their owners less likely to walk away from their mortgage.

If I were a big bank with a large mortgage portfolio, then, I’d love to add a few unique houses to the mix: they would help a lot on the diversification front. But that would involve giving individual bankers more discretion, and trusting them to be good at their jobs. So instead the banks just say no. And the owners of 300 Farmington Road, I guess, are just going to have to wait for a cash buyer to come along. Or be willing to finance any purchase themselves.


I had a similar problem some years ago trying to buy a Geodesic dome house in California (and a real beauty at that). It was listed as “non-standard” construction and as soon as any mortgage broker saw that they wouldn’t touch it with 10ft. pole. Fortunately we had 80% of the money needed for the house and I was able to put the balance on a 0% credit card promotion and kept transferring it to different credit card promotions for a couple of years until I paid it off. When we sold the house a little over 4 years ago, the mortgage for the buyer was not a problem then. Now that things have tightened up I see it’s back to how it used to be.

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Did a rising savings rate kick-start the recession?

Felix Salmon
Nov 8, 2010 18:27 UTC

John Carney arrives at all manner of improbable conclusions after staring far too long at this chart:


Writes Carney:

The economic crisis followed a lurch in inequality and years of depleted savings–but a far more proximate cause was the return of savings. The climb in savings preceded both the financial crisis and the recession, although it was obviously given a boost by both. But the data very clearly show, the growth of savings started while Wall Street was booming…

It sure looks like competitive savings got started, and kick started the recession.

What is this “competitive savings” of which Carney speaks? Well, he’s found an unpublished paper about inquality and savings in China, and extrapolated wildly to the U.S.:

As the rich get richer and society focuses on wealth as a source of social status, everyone else starts saving more to improve their social status. It’s keeping up with the Joneses in reverse—competitive savings.

The problem is that it’s obviously impossible to take findings from China — where the gross national savings rate hit 53.2% in 2008 — and apply them to the U.S., where the savings rate was less than a quarter of that.

And in any case, the climb in savings did not precede the financial crisis. Bear Stearns had to bail out its subprime hedge funds in June 2007, the recession officially began in December 2007, and Bear Stearns fell victim to the financial crisis in March 2008. The housing market had been in free-fall for over a year by that point, especially in areas with a lot of subprime mortgages.

Meanwhile, the chart shows the spike in savings rates taking place in the second quarter of 2008, after the recession had already begun, long after the credit crunch had had time to bite hard, and after the implosion of Bear Stearns.

Let me make this a little more obvious by annotating Carney’s chart:


Clearly, the rise in savings didn’t precede the recession: it took place entirely during the recession, as you’d expect.

And we’re not seeing “competitive savings” here. Instead, we’re seeing the collapse of the housing market. During the housing bubble, people thought of their mortgage payments as a type of savings — building up equity in their homes. Those figures never showed up in the personal savings rate statistics, but helped to explain why the savings rate was so low: people felt that they were saving in bricks and mortar rather than dollars.

When the housing market crashed, people started spending much less money on housing, partly because they defaulted on their loans, partly because they took advantage of lower mortgage rates to refinance, and partly because rents declined. To a large degree they saved rather than spent the savings, as is natural in a recession. That isn’t competitive savings: it’s simple prudence.


I’m sorry but your ALL wrong !

The straw that broke the “camels back” was a complex interaction between excessive debt and spiralling commodities prices specifically oil.

The media would love you to believe that the withdrawl from the lending and mortgage markets is what caused the failure but I’m afraid that’s populist thinking that has been perpetuated by the press, tv media and failed governements that don’t want to accept their part in the failure and was actually the final blowout / consequence of lax corporate and governmental policy decisions.

From 2004 onwards there were many GLOBAL voices that warned about spiralling house prices running out of control and creating a bubble that would only end in tears. It was in no ones interest to stop the party. the banks were making huge profits a) from the lending and b) from the CDO’s that they sold on. Joe public loved to see their net worth rising faster each month and of course for the speculators / investors (buy to lets) it was easy money and lets face it the best money is easy money isn’t it?

Unfortunately (and I single out the UK Labour Govt and specifically Gordon Brown or is that Clown?) Instead of contacting the regulatory authorities and letting them know that they should enforce 3x salary on all mortgage applications he decided that he would join the party and stuff Governments noses in the trough of greed by raising stamp duty on house purchases at “real terms” lower price levels. (Oh the shame of it Gordon)

Well as more and more participants joined the party and people got loaded up with ever more debt the music started slowing down in the form of a) increased taxes on fuel (uk specific again) and the general increases in fuel prices caused by deliberate (OPEC supply controls) and natural supply restrictions. (limited new oil finds and refining capacity).

Joe blogs who had obtained a mortgage on a house that he/ she could never afford started to notice that the cost of EVERYTHING started rising, fuel for their car and heating, food prices, clothing etc and that their average or below average wages couldn’t cover all the extra costs that they now faced. Ooops !
They never considered that the price of EVERYTHING would rise and they also never considered that if it cost them more to live it cost their employer more to provide services and if it cost the employer more he would be forced to lay off staff or raise prices that risked losing business and laying off staff.

Oh what a web we weave …….

So what was joe public to do? Pay the mortage or put food on the table. They chose food, they reigned in spending and teh banks started to foreclose and guess what? BANG the CDO’s were worthless because the one thing that the rockets scientists in the city never considered was who the hell was going to cover these liabilities. It became a game of pass the parcel

Greed was the bubble. Oil was the pin and when the two met the world went BANG!

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Is the Fed engaging in currency war?

Felix Salmon
Nov 8, 2010 16:16 UTC

After the Fed formally announced its new bout of quantitative easing, the CFR’s Sebastian Mallaby lost little time in declaring the move a “foreign policy misstep”:

Even before the Fed’s action this week, there was much loud talk of currency war. This now seems sure to intensify, and the United States has lost its moral authority to broker currency peace.

Mallaby concedes that “the Federal Reserve’s mandate does not require it to consider the foreign policy implications of its actions” — but that’s a bug, not a feature, from his point of view. Indeed, he says, QE “threatens to create a glut of liquidity reminiscent of the mid-2000s savings glut” which was diagnosed and criticized by none other than Ben Bernanke.

It didn’t take long for veteran Fed watcher Greg Ip to push back, cheered from the sidelines by the WSJ’s David Wessel:

There are forms of QE that look more like currency manipulation: unsterilised foreign-exchange intervention, for example, such as the Swiss National Bank and Bank of Japan have both done (and even that is a nuanced case, a debate for another day). But that’s not what the Fed is doing. It is simply trying to do to long-term rates what it has already done with short-term rates…

If QE works as advertised, the decline in the exchange rate will eventually narrow the US trade deficit and reduce the US demand for global savings (though that will be offset as lower interest rates boost domestic investment and consumption). But that hardly turns it into a contributor to the supply of global savings, much less on anything like China’s scale.

Now Paul Krugman is weighing in:

The Pain Caucus — my term for those who have opposed every effort to break out of our economic trap — is going wild.

This time, much of the noise is coming from foreign governments, many of which are complaining vociferously that the Fed’s actions have weakened the dollar. All I can say about this line of criticism is that the hypocrisy is so thick you could cut it with a knife.

After all, you have China, which is engaged in currency manipulation on a scale unprecedented in world history — and hurting the rest of the world by doing so — attacking America for trying to put its own house in order. You have Germany, whose economy is kept afloat by a huge trade surplus, criticizing America for running trade deficits — then lashing out at a policy that might, by weakening the dollar, actually do something to reduce those deficits.

And in a very welcome development, an actual member of the FOMC, Kevin Warsh, has an op-ed in today’s WSJ in which he talks about the “nontrivial risks” of embarking on QE and mentions, among them, “an increasing tendency by policy makers to intervene in currency markets, administer unilateral measures, institute ad hoc capital controls, and resort to protectionist policies”.

Warsh says that the FOMC is able to adjust its policies if “these risks threaten to materialize”, which implies that the Fed is keeping at least one eye on the international consequences of its actions.

There’s actually not a lot of substantive disagreement between the two sides here. Both agree that QE is liable to weaken the dollar, just as rate cuts do; such things are an inescapable consequence of monetary policy and always have been. The debate is over the degree to which Fed actions are harming the dollar, and also the degree to which the Fed should care, in the face of 15 million unemployed American workers.

What’s very welcome here is that the debate is taking place at a high level, in public view, in blog posts and op-eds from journalists, think-tankers, and policymakers. People like Mallaby, Ip, Wessel, and Krugman are informed and engaged observers of the Fed’s actions and their national and international consequences, and the open web makes it easy to follow the discussion from one outlet to the next. These people are explaining and debating and informing the evolution of monetary policy, rather than simply observing and reporting — and the result is much more interesting and illuminating than a just-the-facts approach.



Some time back the Chinese currency was fixed at a constant price rate, now it is pegged against a basket of currencies and from what i have heard, one percentage of it is still fixed, from that prespective i don’t see harm in what the fed does.

Arvind Pereira

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How to buy your way out of a felony charge

Felix Salmon
Nov 8, 2010 13:38 UTC

One of the main contributing factors to the financial crisis was the feeling of impunity and omnipotence which pervaded Wall Street. No matter how egregious their behavior, financiers knew that they would end up wealthy and comfortable. That, in turn, made it much easier to overcome their natural risk aversion.

Jon Hendry now points me to a very shocking real-world (non-financial) example of this. Martin Joel Erzinger is a star broker at Smith Barney, overseeing over $1 billion in assets for “ultra high net worth individuals, their families and foundations”. On July 3, Erzinger was driving his black Mercedes in Eagle, Colorado, and ran over a cyclist — New York physician Steven Milo — from behind:

Milo suffered spinal cord injuries, bleeding from his brain and damage to his knee and scapula, according to court documents. Over the past six weeks he has suffered “disabling” spinal headaches and faces multiple surgeries for a herniated disc and plastic surgery to fix the scars he suffered in the accident.

“He will have lifetime pain,” Haddon wrote. “His ability to deal with the physical challenges of his profession — liver transplant surgery — has been seriously jeopardized.”

Erzinger immediately drove away from the scene of the crime, eventually stopping in a parking lot on the other side of town, where he called the Mercedes auto assistance service and asked that his car be towed.

This kind of egregious hit-and-run is, obviously, a very serious crime. Milo is incredulous at the suggestion from Erzinger’s attorneys “that Erzinger might have unknowingly suffered from sleep apnea”, and wants Erzinger to be charged with a felony. Justice must be served: the case “has always been about responsibility, not money”, he wrote to DA Mark Hurlbert.

Yet Hurlbert, looking at Erzinger’s wealth, decided that the case really was about the money after all:

“The money has never been a priority for them. It is for us,” Hurlbert said. “Justice in this case includes restitution and the ability to pay it.”

Hurlbert said Erzinger is willing to take responsibility and pay restitution.

“Felony convictions have some pretty serious job implications for someone in Mr. Erzinger’s profession, and that entered into it,” Hurlbert said. “When you’re talking about restitution, you don’t want to take away his ability to pay.”

In other words, Erzinger has bought his way out of a felony charge, over the strenuous objections of his victim; it’s very unlikely that online petitions will do any good at this point. Just another thing to add to the list of things that money can buy, I suppose.


I don’t get it… even from a cold-hearted market perspective, would I trust my investment in the hands of someone who (if we dare give him the benefit of the doubt), was too unobservant/distracted/careless to notice that he caused an accident and left someone for dead on the side of the highway. Heck no! Lock the bugger up and through away the key–his usefulness to society is over.

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