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Currency fixing = root of financial crisis?

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Glen

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http://www.financialpost.com/story.html?id=956352

While the G20 is keen on hammering out a new financial order for the 21st-century global economy, one of the key elements of the original Bretton Woods Agreement is unlikely to get more than a passing glance -- currencies.

The cornerstone of Bretton Woods was a fixed exchange rate system designed to prevent the "beggar-thy-neighbour" currency devaluations that wreaked havoc on the global economy in the 1930s. The system broke down in the 1970s, and currencies have been the Achilles heel of the global economy ever since.

Today is no exception. While presidents and prime ministers get set to tinker with new global regulations and promise to pour more stimulus into a beaten-down global economy, the 10,000-pound dragon in the summit room will surely be China's insistence on maintaining a weak currency to boost export growth, and the bulging war chest of foreign exchange reserves around the world.

China, its BRIC brothers -- Brazil, Russia, India -- and other emerging powers may have won a seat at the summit table but the global economy has still not figured how to absorb their growing might without major disruption.

The problem is one of the trickiest and long-standing of global economics: How to encourage countries to allow their currencies to appreciate as their economies mature.

"One of the greatest events in the history of economic development is occurring -- the emergence of the BRIC economies with some three-billion people," wrote Martin Murenbeeld, chief economist of the DundeeWealth Inc. in a recent report. "And it is being [largely] handled with rigid exchange rates. Such a dramatic development requires maximum price flexibility so that the world economy can absorb the "shock" as best as possible."


The immediate cause of the current financial crisis is well known. Financial institutions stocked up on vast quantities of subprime mortgage debt and other related debt securities through the U.S. housing boom of the early 2000s.

As the housing bubble burst, many of those securities became worthless, causing a huge drain on bank balance sheets which, in turn, clogged up transmission of credit around the world.

But the crisis has its roots in the huge financial imbalances that have built up around the world.

Although the U.S. Federal Reserve tried to drive up interest rates as the economy recovered from the tech wreck through 2004, it found it had lost "all control" over its ability to influence longer-term U.S. treasury rates, explained Alan Greenspan during an appearance in Toronto last week.

Despite a growing U.S. and global economy, and rising short-term rates, long-term interest rates remained inordinately low among many developed economies.

Mr. Greenspan, the former Fed chairman, famously called the problem a "conundrum," but that conundrum played a key role in both fueling the U.S. housing bubble and inducing financial institutions to create ever-more complicated and risky credit instruments for investors hungry for yield.

One of the reasons yields were so low was simple: China and other emerging markets were voraciously buying up U.S. treasuries and mortgage-backed securities and selling yuan, Hong Kong and Singapore dollars in order to keep their own currencies weak and exports humming -- the time-honoured mercantilist approach to economic development.
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Some curriences need to be frozen for a while - IE the Canadian dollar. Its seeing movements that ussually takes months and years to play out playing out in mere hours and days instead - these wild fluncations are going to stall our exports as budgets have to be set at a fixed exchange rate and with the rate flucating as it, odds are those estinmates are gonna come in high because of fear the dollar could rise back up and eat up profits. Also something needs to be done with the Chinese - if it wasnt for our materialistic culture and our craving of cheap China goods maybe leaders wouldnt be so afriad of doing something - we need to learn to ween ourselves off of these goods so we can gain some leverage against the Chinese and other developing countries.
 
Jayomatic said:
I hope someone brings back the gold standard.
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what's wrong with the american standard?


images
 
Sorry, this doesn't make sense. Currency fixing (which is common practise in the world) has nothing to do with Alan Greenspan's insistence on basically giving free money to banks (instead of letting the Dot Com bubble fully pop), nor on a lack of regulations which caused complex derivatives to blow out of control.

Besides, it's very common for countries to impose capital controls during the early stages of development precisely to *prevent* massive shocks like what happened in Thailand or Indonesia in 1997.

The Gold Standard is not coming back. Not as long as we expect the economy to grow. Anyone who bought gold in 1980 has lost 2/3 of their value to date. Sound investment there.

It's also very stupid to try to peg the Canadian Dollar with a currency that suffers from massive current account deficit. There's no God Given right for the Greenback to be the world's currency, and once this supremacy ends the US in general will have to live within their means. It's a novelty, I know.

There's little to nothing anyone can do about the Chinese, given that a) they're a big source of foreign investment and b) anyone who tries to ignore China today is a bigger fool than Dick Fuld.
 
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urbanfan89 said:
Sorry, this doesn't make sense. Currency fixing (which is common practise in the world) has nothing to do with Alan Greenspan's insistence on basically giving free money to banks (instead of letting the Dot Com bubble fully pop), nor on a lack of regulations which caused complex derivatives to blow out of control.
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Alan Greenspan addressed that point.

Although the U.S. Federal Reserve tried to drive up interest rates as the economy recovered from the tech wreck through 2004, it found it had lost "all control" over its ability to influence longer-term U.S. treasury rates, explained Alan Greenspan during an appearance in Toronto last week.

Despite a growing U.S. and global economy, and rising short-term rates, long-term interest rates remained inordinately low among many developed economies.

Mr. Greenspan, the former Fed chairman, famously called the problem a "conundrum," but that conundrum played a key role in both fueling the U.S. housing bubble and inducing financial institutions to create ever-more complicated and risky credit instruments for investors hungry for yield.

One of the reasons yields were so low was simple: China and other emerging markets were voraciously buying up U.S. treasuries and mortgage-backed securities and selling yuan, Hong Kong and Singapore dollars in order to keep their own currencies weak and exports humming -- the time-honoured mercantilist approach to economic development.
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Admiral Beez said:
The Chinese are mearly filling a demand with supply. If it wasn't for our demand for cheap stuff, the Chinese, and the Taiwanese, Koreans and before them the Japanese, wouldn't have export economies of much size today at all.
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Very true.

And those wanting the return of the Gold Standard? Do you know how volatile the markets were under the Gold Standard?

No thanks.
 
No one in this thread has suggested going back to the gold standard.

Insofar as "The Chinese are merely filling a demand with supply. If it wasn't for our demand for cheap stuff" being the push behind it, that is wrong. Be serious, when have you ever offered to pay more for something? People always want to pay as little as possible for equal goods and not just in NA. The issue is why is it so cheap.
 
A hundred years ago virtually all currencies were fixed to each other, since they were all backed by national gold reserves. After WW2 almost all western countries pegged their currencies with the Greenback through Bretton Woods. Currently many countries don't even bother with currency pegs; they just use the dollar (or euro).

Perhaps Greenspan should not have lowered the Fed Rate to 1% for over such a long period of time, and simply allowed a deeped tech-bubble-popping recession to occur. But no, it was the New Economy, and we could get wealthy by flipping McMansions.
 
The root is not currency fixing the root is that the deregulation of the US mortgage process and banking rules resulted in global bankruptcy. Selling those 'toxic assets' in large bundles through hedge funds as if they were worth something, to other global banks & countries...caught up with them and takes everyone down with them.
 
Moonmoth said:
The root is not currency fixing the root is that the deregulation of the US mortgage process and banking rules resulted in global bankruptcy. Selling those 'toxic assets' in large bundles through hedge funds as if they were worth something, to other global banks & countries...caught up with them and takes everyone down with them.
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The deregulation just created a conduit for the excess liquidity. Banks are not financial stewards. They are are really just masters of playing hot potato.

http://mpettis.com/2009/01/168/
 
The US mortgage market while big was still a fraction of the global credit market. What caused the crash to propagate was the various international financial institutions buying US mortgage backed securities and setting up similar practices back home. The latter is a big reason why banks are suffering in Europe. It's easy to whip the US, but how come nobody blames the foreign banks for implementing similar practices back home?
 
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