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.
Source: http://www.economist.com
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.
Source: http://www.economist.com
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