Thursday, April 8, 2010

FED TO OPEN UP; NEW TRANSPARENCY? THE US NEEDS TO ACT

FROM A SERIES OF FED WARNINGS IN THE US.....

The New York Times posted an article in which it reported on speeches given by high level representatives of the Federal Reserve System, including chairman Ben Bernanke. See the link below for the original article. Speaking in Dallas, Texas Bernanke made it clear that the US government is facing a tough long-te...rm challenge: either raise taxes, or cut spending on anything from education to defense and/or let people pay more than they currently do for Social Security and Medicare. None of the issues is very popular with either Republicans or Democrats or both.

The bipartisan fiscal commission installed by president Obama will have a lot of work to do. Bernanke also warned for the impact of an aging population, something that is already happening in Europe and Japan. Until now the US was 'lagging' when it comes to the impact of that time bomb.

Other high level Fed representatives also warned their audience in other meetings in New York and Sante Fe, New Mexico.

Their warnings came exactly at the time when former Fed chairman Alan Greenspan had to speek before the Federal Crisis Inquiry Commission. Greenspan did reject the idea that it was Fed policy that led to the crisis by spurring the bubble in housing prices. More or less at the same time William Dudley of the Federal Reserve Bank of New York said in another meeting that the Fed should do more about asset price bubbles. Waiting until it burst is too expensive a strategy.

The US Fed System: Key players in the complex system are warning....

But....will US government(s) listen? Or is the inevitable about to happen? I.e. the US gradually loosing international power to representative countries from Emerging Markets?


Problem is of course that it is difficult to see when a bubble is a bubble. Bubbles develop in a very gradual fashion, incorporating (often too) optimistic ideas about the future by investors. And not just that, due to globalization they are more a global than just a domestic phenomenon and therefore hard to predict let alone control.

TO AN INTERNATIONAL SITUATION IN WHICH THE US IS LESS OF A POWERHOUSE THAN IT EVER WAS DURING THE LAST 50 YEARS....

The US has to face tougher times. From a global world leader that once was home to the dominating world financial market (New York) to a situation of three more or less equally important power blocs (North America; Europe/Japan; and the Emerging Markets) in which London has become a second financial market powerhouse for international securities from issuers in smaller countries. In the old days the net US savings shortage was simply compensated for by excess savings from Europe finding its way to the US financial markets. Today, savings surpluses are not just European anymore but also in the hands of sovereign wealth funds and rich individuals in Emerging Markets. For them, finding the way to Wall Street is not that logical anymore. They have other options to choose from.

And that is exactly what is happening. At a time when the world has to recover from a financial crisis the US has to face its savings deficit with less support than ever before and at a time when aging population threats are adding extra complexity to the longer term strategic puzzle.

It was one thing that the Fed is warning us. Another thing is to what extent US governments will be able to work out a solution that includes doing something about the huge savings deficit in the country.

Click here for the link to the original NY Times article.

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