Economics

Free exchange

Global imbalances and financial stability

Central bankers on the catwalk in Paris

Feb 18th 2011, 23:05 by P.W. | PARIS

PARIS, more used to staging fashion shows, put on a celebrity catwalk of central bankers today. The line-up of big names at a glitzy hotel in the heart of the French capital stretched from Ben Bernanke of the Fed to Zhou Xiaochuan of China, with Mervyn King of the Bank of England, Masaaki Shirakawa of the Bank of Japan and Jean-Claude Trichet of the European Central Bank. Hosting the event—on global imbalances and financial stability—was Christian Noyer of the Bank of France.

That theme goes to the heart of what went wrong in the financial crisis and what should go right in its aftermath. One view is that the imbalances—notably the big current-account surplus chalked up by China and the huge deficit in America—were part of the madness of America’s subprime lending boom, and that a greater willingness on the part of surplus countries to allow their exchange rates to rise and to promote more domestic demand is vital now to sustain a healthy global recovery. Another is that the banking crisis was caused by domestic excesses and aided and abetted by sloppy supervision, and that there is little that can be done to alter current-account surpluses that stem deep within economies.

The world’s central bankers may have agreed to convene to discuss the matter but it didn’t take long for the sniping to begin. Mr Bernanke used the occasion to insist that surplus countries should let their exchange rates appreciate, saying that keeping currencies undervalued had contributed to a pattern of global spending that was unbalanced and unsustainable. The Fed chief didn’t specify China, but it wasn’t long before Mr Zhou was explaining why exchange-rate adjustment was inappropriate given the structural fundamentals generating surpluses, such as the ultra-high propensity to save of Chinese households who lack the safety net of a public welfare system.

So much, so familiar. But there may be more give and take in practice than such public tiffs might seem to suggest. For one thing, Mr Bernanke seems to have modified his tune about the “global savings glut” generated in Asia that supposedly kept American long-term interest rates unnaturally low and helped to propagate reckless mortgage lending. In an accompanying paper, the Fed chief now acknowledges the extent to which Europe—despite not running a current-account surplus—nonetheless gobbled up loads of duff American asset-backed securities by borrowing and thus leveraging up its international balance sheet.

For another, the adjustment that China needs may be happening but not necessarily according to the script. That adjustment is in its real exchange rate, which can occur either through a nominal appreciation or by keeping the yuan unchanged and wages and prices rising faster than in other countries; and there is increasing evidence that this is happening. Similarly, in Germany, another big surplus country, there have been some early encouraging signs that growth is becoming less export-led and more driven by domestic demand.

Underpinning this debate about imbalances is a renewed focus on the balance of payments. This is no bad thing, but not all deficits and surpluses nor even all sustained deficits and surpluses are a bad thing. As Mr Shirakawa usefully pointed out Japan experienced a bubble in the 1980s when running a big surplus while the US had one in the 2000s before the financial crisis when running a deficit. Ageing countries should probably be running sustained surpluses. On the other hand when capital flows “uphill” (ie from emerging to advanced countries) for a prolonged period this is a sign that something has gone wrong.

Imbalances between surplus and deficit countries before the financial crisis were undesirable but that cannot absolve the regulators and central bankers in advanced countries from their responsibility for the mess. Looking ahead, the imbalances may prove more self-rectifying than many presently fear.

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1-9 of 9
Feb 18th 2011 11:41 GMT

"...but not all deficits and surpluses nor even all sustained deficits and surpluses are a bad thing." When are they bad? Only when they cause bubbles? Or only when those bubbles burst and cause great recessions?

Perhaps they're only bad when they're caused by policy distortions - such as US tax policy which encourages overconsumption and corporate off-shoring - and therefore higher deficits, or Chinese currency manipulation which makes our exports uncompetitive.

If the markets are operating on a level playing field that allows the invisible hand to dictate flows, then deficits and surpluses are ok. But when capital flows uphill then we know the playing field isn't level (horrible mix of metaphors).

So, not only are the regulators and central bankers responsible for the mess, but also the policymakers who implemented the market-distorting policies?

hedgefundguy wrote:
Feb 19th 2011 1:03 GMT

As long as our foreign friends lend us money so consumers can purchase thier goods and for our military to protect them and thier shipments I see no big changes.

As a society we must keep up with the Jones' as our Federal government will not change the tax laws to change us from a Consumption nation to a Savings nation. And if inflation picks up, we will see people getting rid of thier dollars even faster and going even deeper into debt.

Regards

bampbs wrote:
Feb 19th 2011 2:13 GMT

All the trade imbalances that have ever been or ever will be are not responsible for the mass delusion of a bubble.

J. Kemp wrote:
Feb 19th 2011 3:01 GMT

It is somewhat entertaining to see Western nations' "central bankers" inviting themselves and others not involved in their self-created crisis to a private little self-examination exercise.

What might be even more entertaining would be if Western central bankers would be so brave as to face a small mob of their victims in close quarters. Imagine a few thousand citizens who saw themselves looted, debt-enslaved and then rendered unemployed by the banking systems which these same Western "bankers" hold so dear.

Walking the plank might a more apt metaphor for such an event.

CJ Lives wrote:
Feb 19th 2011 4:26 GMT

I'm curious about J's placement of "central bankers" in quotation marks.

"Western central bankers are neither western, nor central, nor bankers. Discuss."

L.Y.Z. wrote:
Feb 19th 2011 12:00 GMT

Despite the imbalance, at least it's good to know that it favored the developing countries rather than the developed ones.

The aftermath of the imbalance would be pretty worse if it benefited the richest economies and moreover it sounds fair that the developed countries, the trigger of the 2008 crisis, must bear for their misconduct.

Konker wrote:
Feb 19th 2011 2:26 GMT

If America's economy is too weak to deal with Chinese economic policy now, what influence will it have in 5 -10 years when China is twice the size or more? Presumably by that time China's domestic demand and the demand of its trading partners in Asia will have increased and re-balanced to an extent together with the GDP growth, and the US market will be less important to China anyway. And there is no guarantee that Chinese domestic demand will be based on US imports to any significant degree. The US will have to deal with its own economic policy issues because China will be too big and autonomous to handle.

partisan wrote:
Feb 20th 2011 12:12 GMT

How long will Bernanke lament about undervalued yuan? Making China a culprit for the current mess is hypocricy as the only one to blame is Fed.
What is more hypocritical is forcing China to let its currency appreciate while carring out QE2 which, in essence, devalues US dollar.

Feb 21st 2011 2:51 GMT

Konker, you're right! China has the US by the testicles and there ain't nothing the US can do about it. Massive credit expansion and Federal budget deficits feed the import monster. We are as addicted to Chinese goods as we are to OPEC oil and Mexican cocaine.

What can the US do, slap taxes on Chinese imports? That would do nothing but raise prices in the midst of rapidly rising price inflation already.

The US must quit flooding the world with cheap credit and the Federal guv must quit piling up debt. Those are the only two actions that will change anything. China has nothing to worry about from US retaliation.

1-9 of 9

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