Comments on: Has Smoke and Mirrors Worked? http://www.nakedcapitalism.com/2007/08/has-smoke-and-mirrors-worked.html Sun, 22 Nov 2009 11:45:14 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Anonymous http://www.nakedcapitalism.com/2007/08/has-smoke-and-mirrors-worked.html#comment-464 Anonymous Tue, 21 Aug 2007 22:30:00 +0000 http://www.nakedcapitalism.com/2007/08/has-smoke-and-mirrors-worked/#comment-464 http://www.bloomberg.com/apps/news?pid=20601087&sid=aAq4mKsNz63k&refer=home<br/><br/>http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a71TmD923UUA http://www.bloomberg.com/apps/news?pid=20601087&sid=aAq4mKsNz63k&refer=home

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a71TmD923UUA

]]> By: dis http://www.nakedcapitalism.com/2007/08/has-smoke-and-mirrors-worked.html#comment-462 dis Tue, 21 Aug 2007 20:31:00 +0000 http://www.nakedcapitalism.com/2007/08/has-smoke-and-mirrors-worked/#comment-462 Martin Wolf over at the Ft is predicting a cut in a piece I found very interesting.<br/><br/>Here is an excerpt<br/><br/><i>Nothing that has happened has been a product of Fed folly alone. Its monetary policy may have been loose too long. The regulators may also have been asleep. But neither point is the heart of the matter. Assume that the US remains a huge net importer of capital. Assume, too, that US business sees no reason to invest more than its retained profits. Assume, finally, that the government pursues a modestly prudent fiscal policy. Then US households must spend more than their incomes. If they fail to do so, the economy will plunge into recession unless something else changes elsewhere.<br/><br/>This is why the Fed is sure to cut interest rates if today’s crisis seems likely to reduce the supply of credit (as surely it will). Would that work or might the Fed find itself “pushing on a string”, as the Bank of Japan did so painfully in the 1990s and early 2000s? A good guess is that the policy would work. But if it did not, there would be only two ways out: a huge fiscal expansion in the US or a huge reduction in the US current account deficit. The former looks undesirable and the latter inconceivable.<br/><br/>Today’s credit crisis, then, is far more than a symptom of a defective financial system. It is also a symptom of an unbalanced global economy. The world economy may no longer be able to depend on the willingness of US households to spend more than they earn. Who will take their place?</i><br/><br/>http://www.ft.com/cms/s/0/a3beaa64-5001-11dc-a6b0-0000779fd2ac.html Martin Wolf over at the Ft is predicting a cut in a piece I found very interesting.

Here is an excerpt

Nothing that has happened has been a product of Fed folly alone. Its monetary policy may have been loose too long. The regulators may also have been asleep. But neither point is the heart of the matter. Assume that the US remains a huge net importer of capital. Assume, too, that US business sees no reason to invest more than its retained profits. Assume, finally, that the government pursues a modestly prudent fiscal policy. Then US households must spend more than their incomes. If they fail to do so, the economy will plunge into recession unless something else changes elsewhere.

This is why the Fed is sure to cut interest rates if today’s crisis seems likely to reduce the supply of credit (as surely it will). Would that work or might the Fed find itself “pushing on a string”, as the Bank of Japan did so painfully in the 1990s and early 2000s? A good guess is that the policy would work. But if it did not, there would be only two ways out: a huge fiscal expansion in the US or a huge reduction in the US current account deficit. The former looks undesirable and the latter inconceivable.

Today’s credit crisis, then, is far more than a symptom of a defective financial system. It is also a symptom of an unbalanced global economy. The world economy may no longer be able to depend on the willingness of US households to spend more than they earn. Who will take their place?

http://www.ft.com/cms/s/0/a3beaa64-5001-11dc-a6b0-0000779fd2ac.html

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