What is uncharitable about not giving higher interest rates just because savers are looking for them? If you cannot sustain higher rates you cannot in good conscious offer them. Or do you honestly believe if I am looking for a 20% CD interest rate that someone should be “charitable” enough to offer it to me?

I did NOT say private enterprise is “always so superior”, YOU did. At least private enterprise has competition to encourage innovation and cost-effectiveness. The role of government is to ensure the market stays that way. If the government becomes an active player they will always play unfairly because they do not care about making a profit due to their alternative subsidy called “tax the public”. Private enterprise cannot do that.

1) too much easy money from banks, leading to:

2) not enough bank lending, leading to:

3) small businesses closing for lack of operating resources, leading to:

4) a general and permanent shrink in the global economy.

if markets were completely left to their own devices wouldn’t pirates and brigands take over the rigging and regulating? (but maybe that’s exactly what has happened in finances)

Of course the government has to plan and approve fiscal spending. Bernanke’s Asian Spending Glut Hypothesis is not arguing that Chinese saving forced our Legislative/Executive branch to spend more than the tax revenues. What Bernanke was essentially saying was that there was obviously as much or more demand for our debt than supply because interest rates decreased. The word “forced” refers to the argument that if China kept saving the money they could have been paying their manufacturing employees than America’s unemployment would have increased because Chinese could be more price competitive than the US.

Thus, in reality, China “forced” America to decide between two choices that COULD have unhappy endings: higher unemployment or more debt. Chinn and Frieden seem to suggest that if America didn’t have this huge fiscal debt, other economic indicators would look similar to what they have looked like since 1997. But of course every dollar that we don’t borrow has consequences just like every dollar we do borrow has consequences.

Really? In the short term, perhaps we can hold supply and demand constant, but surely not in the long term. In the long term, does “self-correcting” mean anything?

Despite the availability of capital at low cost, if the participants in the markets had made sound investment and lending decisions, the regulators had monitored behavior effectively and enforced the rules, cheap capital wouldn’t have resulted in this outcome.

I agree with Chinn and Frieden on all counts reported here. I also agree with the reported emphasis on regulatory failure, fed policy and Bush administration tax and spend policy. Democrates are often labeled “tax and spend” Democrats. To be fair, why not label Republicans “borrow and spend” Republicans?

Really? Some markets, such as those in time-limited derivatives, are. Others, such as those in theater tickets, do not seem to be. In general, are markets not chaotic? Does the existence of supply and demand curves not indicate that there is nothing to converge (correct) to?

“It is necessary to dispense with the view that all this excess saving from the rest of the world was “forced” upon us.”

One can blame the “character” of the US consumer, and surely this is part of the story. But the US relied heavily on the theory that markets were self-correcting (and they are, in the long run and in the absence of distortions). While relying on the self-correcting nature of the markets to fix problems that develop over the course of 30 years is always dangerous, it’s particularly foolish when the markets (in this case, the currency market) is being deliberately distorted by a regime with Mercantilist policy goals.

Jeffrey Frieden has contributed extensively to the literature on “varieties of capitalism” and the adaptation of national economies to policy regimes. He should be highly sensitive to the issues surrounding Chinese currency policy. And frankly, Chinese currency policy was only this problematic because of the complete faith our own economists put in a neo-liberal trade framework (aka, if someone is giving you a massive trade subsidy, including subsidized credit, don’t respond with tariffs, but say thank you!).

(1) Canadian banks have started trade missions to China. Which banking system would those famous Chinese savers prefer? Canadian versus American / Swiss / German / British?

(2) Canadian banks are bringing their American divisions (which are in the red) in line with Canadian regulation.

(3) Canadian banks have the cash reserves to buy American banks. (A case of foreign take over perhaps?)

Seriously, I hope they’re getting it closer to right, and I’m happy to give them my business. Canada in its current state seems far more down to earth than our economic insanity.

1) cheap labor and/or productivity
2) cheap debt (low interest rates)
3) wealth/income inequality
4) a price inflationary attitude from the 1970′s when the fed was really fighting price deflation because of their cheap labor policies (outsourcing, legal immigration, illegal immigration)
5) bad assumptions about future wage income and/or future asset price gains

Any more?

The Voyage of a Dollar

http://www.theatlantic.com/doc/200801/fallows-chinese-dollars/3