Oct 14 2008
The Begining of the End
Leaving tomorrow for Japan. Just some thoughts to write down …
1. I think the financial crisis is about to be over. Once the extra liquidity is taken out of the system and excess leverage is held in check, we will go back to the basics. The production function comes down to K and L (capital and labor). When both are healthy and in balance, I think we are fine. The real depression will only come when natural resources becomes the bottle neck.
2. The British rescue package (i.e. injecting cash to banks) is a superior solution to the original American one. Bernanke kept saying “price discovery”, which I interpret as to let market figure out asset’s true price. However, the original package ran contrary to this principle: it required the government to buy up assets (instead of letting banks to pick sellers and set prices).
3. Although commercial banks are saviors of the day, the “animal instinct” of investors will again raise the profile of ibanks. No wonder Goldman Sachs decides to apply the NY state bank charter, instead of the national one: it doesn’t care about retail banking at all.
4. Japanese Yen and Chinese RMB will likely appreciate. Since Japan cannot lower rates any more, it will have to absorb the impact of increased domestic debt by other nations (produced by the bailouts). China may lower the rates but I believe it is under greater inflationary pressure than everyone else. Therefore, it may have to raise rates or appreciate RMB.
5. For the developed nations, it is easy to release money to the market in unison. But it is going to be a lot harder to take money out of circulation once the economy improves. To be more precise, since nations recover at different speed, some may need to restore monetary discipline earlier than others. However, because the financial market is globalized, the liquidity excess may soon return (or linger?).
6. Is Moral Victory is now called “Nobel Prize”? The Swedish Academy shouldn’t be playing God. If Krugman gets an “early” pass, then Gore and DaLai got an easy one.