There's this TIME article gaining attention that mentions economist Ricardo Caballero making the case that other countries, by deliberately running up large external surpluses to help build reserves, are more responsible for the US subprime crisis than America itself:

Caballero says that [the blame America thesis] is wrong. His story of the financial crisis begins not in the rising condo buildings or growing developments in Miami or Las Vegas, but in investment houses and offices of central bankers in Beijing and Riyadh. Caballero asserts that international investors, particularly those tasked with deploying the reserves of foreign governments, prefer relatively safe investments, which made the normally stable U.S. economy a natural hunting ground. The money might have gone into stocks, but after the Nasdaq and stock market rout of the early 2000s, investors' appetite shifted to bonds.

China, contending with a huge trade surplus with the U.S., bought more and more Treasury bonds, pushing down yields and making Treasuries less attractive to other foreign investors. As a result, the rising demand for higher yielding U.S. debt opened the door for Wall Street investment bankers to spin out new classes of fixed-income securities, most notably collateralized debt obligations or CDOs. Much of the money raised by those investments was funneled in the mortgage market. That gave lenders the ability to make more loans, allowing more people to buy houses and push up real estate prices. Many of those loans, it turns out, were made to people who couldn't afford to pay. What happened next — real estate bust, foreclosures and Wall Street mayhem — is well known.

While those in mainstream (American) media might find this idea novel, IPE Zone readers should know better. Even before the crisis hit, Ben Bernanke was already proffering his highly problematic and self-serving "deficits don't matter because there's a global savings glut" thesis. More recently, the eminence grise of financial reporting, Martin Wolf of the Financial Times, made a similar case in anticipation of the crisis in Fixing Global Finance. As an aside, I recently read this book and was struck by how he didn't offer an explanation of why global finance now needed fixing when he previously wrote a book entitled Why Globalization Works. If it ain't broke, don't fix it, eh? Perhaps he needs to read the Foreign Policy article on Big Idea, Big Title works as well! Anyway, here's Harold James' review of Wolf's more recent book in the pages of Foreign Affairs where he notices this very thing:

In this new work, Wolf expertly relays the debates that followed the Asian financial crisis of 1997-98 and the extraordinary ballooning of the U.S. current account deficit in the first years of this century -- debates that asked whether the global imbalances that had prompted these crises were extraordinary threats or permanent features of the world economy. For Wolf, these imbalances are extraordinary, and it is they, rather than globalization itself, that threaten the stability of both mature and emerging markets.

In a move that may seem odd today, given the current talk about the end of capitalism, Wolf's book casts the American model of financial liberalization as a hero and Chinese mercantilism as a villain. Wolf argues, for instance, that China's "inordinately mercantilist currency policies" have caused dangerous imbalances. In order to maintain its exports' competitiveness on the world market and keep a vast (and potentially restive) work force occupied, Beijing prevented the Chinese currency from appreciating against the dollar and thus from driving up the price of China's exports. The result was a vast trade surplus. A byproduct, largely unintended, was the piling up of reserves of U.S. dollars, which Beijing then placed mostly in U.S. government securities. (It also invested in quasi-state institutions, such as Fannie Mae and Freddie Mac, thereby indirectly enabling their recklessly aggressive lending.) This is Wolf's international spin on Alaskan Governor Sarah Palin's explanation for the crisis -- "Darn right, it was the predatory lenders" -- only his predators are the Chinese.

Which brings me to Ricardo Caballero's latest academic piece on this Bernanke-Wolf theme. While he doesn't absolve Americans of being faultless in the matter, the root cause of the crisis was (yawn) the rest of the world. Here's the abstract:

One of the main economic villains before the crisis was the presence of large “global imbalances.” The concern was that the U.S. would experience a sudden stop of capital flows, which would unavoidably drag the world economy into a deep recession. However, when the crisis finally did come, the mechanism did not at all resemble the feared sudden stop. Quite the opposite, during the crisis net capital inflows to the U.S. were a stabilizing rather than a destabilizing source. I argue instead that the root imbalance was of a different kind: The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the U.S. financial system and its incentives (and this was facilitated by regulatory mistakes). The crisis itself was the result of the negative feedback loop between the initial tremors in the financial industry created to bridge the safe‐assets gap and the panic associated with the chaotic unraveling of this complex industry. Essentially, the financial sector was able to create “safe” assets from the securitization of lower quality ones, but at the cost of exposing the economy to a systemic panic. This structural problem can be alleviated if governments around the world explicitly absorb a larger share of the systemic risk. The options for doing this range from surplus countries rebalancing their portfolios toward riskier assets, to private‐public solutions where asset‐producer countries preserve the good parts of the securitization industry while removing the systemic risk from the banks’ balance sheets. Such public‐private solutions could be designed with fee structures that could incorporate all kind of too‐big‐ or too‐interconnected-to‐fail considerations.

Really, I have no idea why the journos find Caballero's work unique when it's ground that been very, very well trodden already. You can read the rest of Caballero's article via the link above although I'd be hard-pressed to find something new.

21/1 UPDATE: Add Bank of England Governor "Swervin'" Mervyn King to the echo

An old professor of mine pointed out that "business intelligence" did not often require special connections to movers and shakers of high finance and holders of office. No, it might be something as mundane as reading the pages of the Wall Street Journal and picking up a story that most everyone else missed for one reason or another. Try and connect the dots in an otherwise jiggery pokery image and you may eventually realize a pattern that no one else sees.

As quite a few readers probably know, Brad Setser--then of RGE Monitor, subsequently with the CFR, and now working for the White House's National Economic Council--gave me my first break in blogging. Then, as now, we shared an obsession with China's trade relations with the United States. Hence, a guest post I did for him concerned my bread-and-butter material of Sino-American trade conflicts. Working for the White House, Dr. Setser is naturally more guarded in expressing his personal opinions nowadays lest his comments be misinterpreted as deviating from a tightly controlled line. The limited output we get from him like this post prior to the Pittsburgh G-20 is understandably supportive of Obama administration efforts. It is likely that we disagree on major points of American policy nowadays, but I learned a lot from him nonetheless. Hey, if arch-Chicago School doctrinaire Milton Friedman had Andre Gunder Frank of leftist "underdevelopment" fame as a PhD student, then I suppose I'm not much of a stretch.

I bring this up because, sometime ago, he had a somewhat famous post concerning "Where is My Swap Line?" in the aftermath of the onset of global financial crisis. If you will recall, the Federal Reserve extended swap lines to friendly foreign countries to help them deal with difficulties obtaining dollars. The Federal Reserve describes these "temporary reciprocal currency arrangements" with other central banks thusly:

On December 12, 2007, the FOMC announced that it had authorized dollar liquidity swap lines with the European Central Bank and the Swiss National Bank to provide liquidity in U.S. dollars to overseas markets, and subsequently authorized dollar liquidity swap lines with additional central banks. The FOMC has authorized through February 1, 2010, the arrangements between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank.

These swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve.

We are of course nearing the first of February when these swap lines end. The gist of Setser's post was that, despite the onset of crisis, the United States, the only country in the world that can print dollars, still had a very important role in ensuring that mechanisms of global finance did not seize. Despite all the talk about America being a has-been you get from this and other blogs, America was still in a position to provide global public goods via relatively inexpensive access to dollars using swap lines. Or, at least to foreign central banks that were democracies on good terms with Washington.

Having provided you with perhaps more background information than you want to know, the Wall Street Journal now reports that these swaps--which at one time totalled $500 billion+--are going the way of the dodo unless these lines are renewed once more:

A few days ago we looked at how internationalized financial difficulties have become by analyzing how the 2004 Greek Olympics have contributed to Greece's Olympian money woes. Well, continuing with the theme of higher, stronger, faster deficits, news outlets are reporting an interesting relationship Greece is purported to have with the holder of the 2008 Olympics--China. Republicans in America have a stock solution for everything that ails of "cut taxes." If I have one, it's "sell it to the Chinese."

Apparently, the Greek authorities may have contemplated this idea in financing its gargantuan pile of debt. The Financial Times reports that while Hellas is reluctant to admit flogging Eur 25 billion ($35 billion) worth of bonds to Beijing via Government Sachs, it certainly doesn't sound far-fetched. What's more, the squelching of this rumour is causing yields on Greek bonds to rise considerably:

The mayhem unfolded after Greece denied it had given a mandate to Goldman Sachs, the US investment bank, to sell government debt to China. Greek 10-year bond yields closed at 6.70 per cent, 0.48 percentage points up on the day. The Financial Times reported on Wednesday that Athens was wooing Beijing to buy up to €25bn of government bonds in a deal promoted by Goldman. China had not yet agreed to such a purchase, the FT said.

The government’s comments unsettled markets because of their implication that China, with $2,400bn in foreign exchange reserves, was not interested in increasing its exposure to sovereign Greek debt. Experts, though, said that heavier Chinese purchases of Greek debt would be no less disturbing. For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme,” said Marco Annunziata, chief economist at Unicredit.

Yu Yongding, an astute commentator on China's international financial dealings who Chinese powers-that-be listen to, believes Greek debt is an even worse prospect than American debt, thus negating any "diversification" advantages:

China shouldn’t buy a “large chunk” of Greek government debt to help rescue the nation because the securities are more risky than U.S. Treasuries, said Yu Yongding, a former adviser to the Chinese central bank.

Greece has a lower debt rating than the U.S. and its statistics have been “sharply” criticized by the European Commission, said Yu, currently a member of the Chinese Academy of Social Sciences, a government-backed research body. The Greek Finance Ministry yesterday “categorically“ denied a report in the Financial Times that it is wooing China to buy as much as 25 billion euros ($35 billion) of its bonds. “It is unreasonable for an economist to support a diversification away from an unsafe asset class to a much more unsafe asset class,” Yu said in an e-mailed response to questions. “Let European governments and the European Central Bank rescue Greece.”

I like him pointing out that American debt is unsafe (as if the rest of the world didn't know that already). Despite official protestations about not requiring any help, I believe that any rescue package for Greece will involve the EU despite rhetoric to the contrary. If such were the case, I believe that an IMF-led programme would vouchsafe EU lending anyway. For Star Wars fans, treating Greece as the "Alderaan" of the PIGS (Portugal, Ireland, Greece, and Spain) may be just the thing to get the others to fall in line. Instead of inviting moral hazard (with Spain being the rotating head of the EU at the current time and whatnot), demonstrating "don't make me destroy you" by forcing Greece to the IMF poorhouse if it doesn't behave may be just the ticket to make these deficit-swilling countries behave.

I have a similar idea for well-deservedly humbling America for its fiscal degeneracy that I'll talk about in due time. Where's the rebel base? You sir are the fiscal rebel, and extirpating your prodigal ways is long overdue.

"What price progress?" It's one of the things that has continually puzzled those studying development. Reiterating the conviction that there is no such things as a free lunch (Cheneynomic sympathizers aside), the gradual shift to industrialization and urbanization has often resulted in long-term changes in demographic trends. In demographics, a model for interpreting these changes in population as development proceeds is called, fittingly enough, the demographic transition model (DTM). First outlined in 1929 by Warren Thompson, it has remained quite illustrative in explaining population changes during subsequent periods.

The Wikipedia entry describes the four theorized stages in the demographic transition quite nicely. Although never a perfect mirror of reality in many countries, it works well enough for more than a few instances:

1. In stage one, pre-industrial society, death rates and birth rates are high and roughly in balance;
2. In stage two, that of a developing country, the death rates drop rapidly due to improvements in food supply and sanitation, which increase life spans and reduce disease. These changes usually come about due to improvements in farming techniques, access to technology, basic healthcare, and education. Without a corresponding fall in birth rates this produces an imbalance, and the countries in this stage experience a large increase in population;
3. In stage three, birth rates fall due to access to contraception, increases in wages, urbanization, a reduction in subsistence agriculture, an increase in the status and education of women, a reduction in the value of children's work, an increase in parental investment in the education of children and other social changes. Population growth begins to level off;
4. During stage four there are both low birth rates and low death rates. Birth rates may drop to well below replacement level as has happened in countries like Germany, Italy, and Japan, leading to a shrinking population, a threat to many industries that rely on population growth. As the large group born during stage two ages, it creates an economic burden on the shrinking working population. Death rates may remain consistently low or increase slightly due to increases in lifestyle diseases due to low exercise levels and high obesity and an aging population in developed countries.

What brings all this to mind were recent articles discussing demographic trends in Taiwan and Singapore--two of the four Asian Tiger economies together with Hong Kong and South Korea. Together, they gained massive international notice during the eighties and nineties for their rapid economic growth. However, it now appears that these countries may not only top the global league tables in terms of reserve accumulation and development success. As Thomson predicted all those decades ago, they too are enduring a fertility slump. The so-called replacement rate to maintain a stable population size is said to be 2.1 births per woman, assuming even odds of conceiving a male or a female, who in turn must also conceive 2.1 children and so forth.

While statistical compilers rank them differently, Asian tigers have a near-lock on being the least fertile places on the face of the Earth. For the period 2000-2005, the UN says Singapore had a fertility rate of 1.35, South Korea 1.25, and Hong Kong 0.94. (There are no statistics from the UN on the Republic of China or Taiwan as it isn't a member, of course.) However, this recent TIME report quotes statistics suggesting Taiwan has overtaken Hong Kong to become the world's worst no-kiddo zone. The forthcoming demographic vacuum has caused alarm and occasioned some government action:

"This is a tragic society," Taiwan's Health Minister Yaung Chih-liang proclaimed in a Nov. 28 speech at the National Science and Technology Museum. He warned that if the island continues on this track, the population would experience a future labor shortage and that the next generation of children would have significant difficulty covering the health costs of their aging parents. That intense financial pressure, he said, could raise the future suicide rate. The Education Minister, in a separate statement, predicted that one-third of Taiwan's colleges will close in just 12 years if the trend continues.

In a society where the cost of living is high, the notion that kids are an unwelcome burden — taboo in many cultures — has become an accepted idea. Take the title of a recent panel discussion put on by Taiwan's Human Social Sciences Foundation: 'Having Children! Does It Hurt That Much?' "The hurt," explains the foundation's president, professor Liu Pei-yi, "refers to financial loss." In a research poll administered by Kun Shan University in 2007, students interviewed 100 residents of Taiwan between the ages of 20 and 40 about their family plans. One-third didn't plan to have any children for fear of losing two precious things: money and freedom.

Balancing work and family life has proven to be a challenge for both men and women in Taiwan. According to the Swiss-based International Institute of Management Development, Taiwanese work some of the longest hours in the world, averaging nearly 44 hours a week, and Taiwan's women are very career-oriented. "Most women are afraid of losing their jobs" by taking time out to have a child, says Liu. He says Taiwan should follow the lead of European countries like Germany, where women are entitled to up to three years of maternity leave by law. Taiwan has been making progress in this area; in 2002, the government passed a law requiring companies to allow their employees two-year parental leaves without pay. This year, a policy came out that enables parents to take six months of parental leave while receiving 60% of their salary. But many say these changes only look good on paper, as most bosses discourage people from taking the time off.

Should migration be the encouraged to counter these demographic trends? Singapore's example is illustrative of the challenges in accommodating large-scale migration. It's a mirror image of debates occurring in the Western world:

By some estimates, a third or more of Singapore's 6.8% average annual growth from 2003 to 2008 came from the expansion of its labor force, primarily expatriates, allowing Singapore to post growth more commonly associated with poor developing nations.At the same time, though, foreign workers have driven up real estate and other prices and made the city-state's roads and subways more congested. Their arrival has kept local blue-collar wages lower than they would be otherwise, exacerbating Singapore's gap between rich and poor.