"In some sense though it doesn’t really matter now that the Treasury has indicated it won’t allow systemically important financial institutions to fail: in both cases though the ultimate guarantor against losses is the US Treasury."
Great to know.
"You could argue that SAFE and the Fed have combined forces to keep the US economy afloat over the past year. SAFE financed the lion’s share of the United States external deficit – and did most of the heavy lifting earlier in the year when private investors didn’t like the dollar. The Fed’s financing has kept the US financial sector afloat. That incidentally is something that financial sector executives might want to consider as they award bonuses; many financial firms would have failed and not been able to pay anything absent taxpayer support –
On the other hand I would argue that the US shouldn’t give to much credit to SAFE for helping to stabilize the dollar earlier in the year – and for providing the US subsidized financing that has helped keep US borrowing rates fairly low. Why – because a lot of the vulnerabilities that built up in the US economy between 2003 and 2007 can be linked – in part – to large purchases of dollars by SAFE during that period. Holding the RMB down discouraged investment in the US tradable sector, and encouraged investment in interest-sensitive sectors not exposed to Chinese competition (think homes). And the rise in China’s surplus even as the oil exporters surplus was growing implied large offsetting deficits in the US and Europe. In practice that meant that Chinese demand for US assets — with more than a bit of help from US and European banks and shadow banks — supported the low level of savings and high level of borrowing in the US household sector."
I know that it might have made the low level of savings and high level of borrowing possible, but did it make it inevitable. I'm beginning to feel that it's either the products or conditions, and not the actors, who are responsible for this mess. I just don't believe it.
Here's my comment:
“In practice that meant that Chinese demand for US assets — with more than a bit of help from US and European banks and shadow banks — supported the low level of savings and high level of borrowing in the US household sector.”
It’s one thing to make something possible, another to make it inevitable. Is there any place for human agency in these crises?
Either money is too tempting, or the products are too complex. I just don’t buy it. But then, I’m no expert, just someone trying to understand how these decisions get made.