'The Way Forward' Is Way Off: Global Reforms Needed
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (TheStreet) -- In my last article, I wondered how the authors of The Way Forward could completely ignore the role of banks as contributors to our global economic malaise. In this piece, I will look at their recommendations on what needs to be done globally to rectify the situation.
Capital Flows: The authors of the study, Daniel Alpert, Robert Hockett and Nouriel Roubini, or AHR, argue that capital inflows from emerging market countries contributed significantly to the U.S. housing/spending bubble that burst in late 2008. They assert further that a significant portion of those capital inflows came from emerging market governments (primarily China) trying to keep the U.S. dollar strong, so as to give their exporters a competitive advantage. They are critical of "China's continuing policy of pegging the yuan to the dollar."
There are several problems with these assertions.U.S. Capital Inflows: Table 1 gives data on foreign government and private investments in the U.S. for the 2000-2007 period. While foreign governments purchased $1.4 trillion of U.S. government securities during this period, the foreign private sector purchased far more, $3.8 trillion, with most purchases being equities. These figures suggest to me that the Chinese government was not the main driver of what happened during this period. Instead, U.S. dollar investments were attractive worldwide. In short, this global demand for U.S. financial assets was far more important in keeping the U.S. dollar strong than Chinese Treasury purchases. These "portfolio choices" had more to do with what foreigners saw as good investments than efforts to keep the dollar strong. U.S. Policies: To ease the threat of currency appreciation or inflation, central banks often attempt to "sterilize" capital flows. In a successful sterilization operation, the domestic component of the monetary base (bank reserves plus currency) is reduced to offset the reserve inflow. The Fed had the tools via its discount window and open market operations to mop up excess liquidity resulting from capital inflows. They chose not to use them. Other AHR Policy Recommendations: The majority of AHR's other recommendations are directed at least in part at China. Inasmuch as I ran a company with Chinese partners for more than a decade working in Asia, I believe I have a pretty good sense of how Chinese authorities would view the AHR suggestions. Consequently, my comments below reflect my sense of how China thinks.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV