7894bdb0_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 19:43
Confused: Don Boudreaux writes on this at Cafe Hayek. Background of book is showing how similar emerging market countries are to developed countries; poor countries compared to rich countries; hubris, rich countries tend to think they are different. Challenge claim that running a current account deficit is increasing indebtedness to the rest of the world. In the United States we ran large, persistent capital account surpluses, current account deficits, going back to the mid-1970s till the present. Those did not necessarily increase U.S. indebtedness to the rest of the world. If foreigners buy American equity, if they buy corporate debt that finances real productivity and factories and projects, isn't there a distinction between that and, say, the U.S. government borrowing money to live beyond its means? Is it really the case that a current account deficit means increasing debt to the rest of the world. Asians tried to convince of that prior to 1997. Current account statement encompasses both advanced economies and emerging markets. Asia prior to its crisis had huge current account deficits, a lot of which was foreign direct investment. Wouldn't call it just debt flows. Ex ante difficult to know how productive those investments are. Also ex ante difficult to know how those funds flowing in are going to have multiplier effects through the financial industry. In both emerging markets and advanced economies, there is a high correlation between current account deficits and credit availability. The actual type of inflow does matter in the issue of the abruptness of the reversal: short term lending can be brutal in how quickly it turns around--was true in Mexico and Asia; wasn't true in the United States because it wasn't primarily bank lending. The association between large current account deficits and availability of domestic credit is very strong. Earlier work with Graciela Kaminsky on the twin crises. Money is fungible. Ireland, Spain, and the United Kingdom all had huge capital flow bonanzas. How do you define a bonanza? Definition has to be country-specific: running a particularly large current account deficit relative to what you have historically have run. Big by your own standards. Spain. Those were countries that also had very large housing price appreciation. What's fascinating about crises in general, this one in particular, and economics is that there are many things going on at once, and it's very hard to understand that they are sometimes related; can't hold one constant while changing another. There is a tendency for people to look at the piece of the elephant they are focused on, leg, side, trunk, tail. Monetary policy is one story that people tell, housing policy problems; suggesting more underlying problem, which is an enormous increase in availability of credit that flows into asset prices, and through the banking sector often into housing prices. Examples: United Kingdom and United States have floating exchange rates, so they have independent monetary policy; but Ireland and Spain did not, part of the Euro zone. The inflow provides availability of credit which can be funneled into productive investments. That often happens in the early stages of the cycle. Run-up to the Asian crisis a really good example of that. As the inflow continues, more peripheral products. Move down the productivity chain. Many factors; don't want to downplay the importance of others.
Reinhart on Financial Crises | EconTalk | Library of Economics and Liberty