Once again, good old Alan Greenspan is right: the balances must be considered and implemented now at the level of nations and financial institutions taking into account the global balances, which is a little trickier than the time he chaired the Fed ...
He addressed this problem in his book, The age of turbulence, particularly with regard to productivity gains and the global equalization of trade balances.
Chinese farmers increase their productivity considerably by working in factories (and they derive great benefits), which also benefits Americans who can buy goods costing less than if they had been produced in the United States.
The balance of trade of China and the United States are both highly unbalanced but the global balance is achieved, which is essential and overall productivity gains are higher than the endogenous productivity of each country.
Globalization is a win-win game (these ideas are already well known).
The financial and monetary problems are more difficult to understand and control because the balance must be achieved in a way globally, nationally and in each financial institution (banks and insurance companies).
The Central Bank of China holds reserves in U.S. $ ($ 1 900 billion), which enables it to catch up with the banking and monetary imbalances inherited from previous decades (time of Mao’s communism).
Also, Treasury Bills (covering the deficits of the government) do not need to be purchased by capital from activities conducted in the United States. They have to be purchased by regularly earned dollars on markets without creating monetary, which is the case.
Again the balance is achieved globally for the benefit of all parties while an imbalance appears in each nation, which has no disadvantage.
On the other hand, it is important, and this is fundamental, even vital, there is sound money in each nation, i.e. without monetary creation, without hypertrophy of the money supply.
However, people from the Fed, including Alan Greenspan and B-2 (Ben Bernanke), identified the existence of two bubbles in the financial sector: first, the so-called sub-prime, broke on the 2nd half of 2007 and first quarter 2008, the second erupted dramatically from last September 15 (the so-called crisis CDS).
Once again, derivatives, although they represent a considerable mass of commitments, are not dangerous as long as they are properly covered (which has almost always been the case since they exist).
If this is not the case, profits are not right, that unearned money circulates (it is monetary creation), a very dangerous bubble needs to burst at the earliest.
Otherwise, there are monumental losses ... which are healthy then the bubble bursts in absorbing the unearned money.
Conclusion: it was essential that the new generation Stealth bomber takes action to destroy the second bubble, which was done with the help of his loyal employees, including Henry Paulson.
They hurt very badly, but then it will the best for the good of us all!
The creative destruction continues in the US banks. Their sanitation through the necessary recapitalization from so-called public capital, i.e. capital channeled through government agencies.
As money managers have lost faith in banks, they prefer to place them in Treasuries and capital will then move to the capital of banks.
There is no monetary creation in this circuit (as the capital borrowed legitimately exists and moves normally) or real deficits because the amounts borrowed are not spent but invested in the capital of banks. These banks will be viable and will again benefit when these disturbances are over (in a few months).
Moreover, Alan Greenspan notes that the ratio of equity to assets of banks was 100% 5 000 years ago, it was still at 60% in 1840 in the United States to fall to exceptionally low levels (less than 10%) after the WWII.
Insofar as there is no a priori possible financial institutions, laws or rules effective in preventing the development of bubbles from commitments not covered in derivatives, enforcement of contracts is the only feasible thing. But it weakens the financial institutions (investors have more confidence in their accounts).
Logical consequence: banks must increase their equity (in relation to their total debt of my credit multiplier μ) to consolidate their credibility.
This is what happens in the United States.
Finally, the Fed is not really a lender of last resort, but a reprocessing plant of capital which, under the label prosecutions, can recapitalize the banks when the markets have more confidence.
After the irrational exuberance of the markets, the Fed is now obliged to intervene to counter their irrational depression.
If Americans operate well in the current turbulence, it is not the same elsewhere, and particularly in Europe: Sarkozy & co do everything so that there is no creative destruction in the financial sector or elsewhere. This prevents the return of fundamental balances, and worse, they increase government deficits by spending intemperately.
The rescue plan announced by Barack Obama will be financed by recovery (which will happen within 6 months) and offset by cuts in unjustified public spending, this is not actually a Keynesian stimulus.
In addition, hypertrophy of the money in the euro area condemns these countries to a lowest potential growth optimal for decades to come, as in Japan.