Aeneidos ('The art of exporting inflation' part II)

Hegemony through global hedge funds
Kenneth Rogoff


The recent volatility in global capital markets should give pause to those who say German leaders, who have been arguing for greater transparency in global hedge funds, are just sore losers.

American and British policymakers, in particular, say the German whining is nonsense, and that hedge funds, along with other New Age financial entities such as private equity firms, are key innovators in today’s global economy.

This debate is ... clouded by a healthy dose of national self-interest. With New York and London the centres of global finance, the United States and Britain have enormous profits at stake. So it is convenient for them to downplay the likelihood that risks to the world’s financial system will be spread more evenly than the benefits.

German leaders, by contrast, must reckon with a populace that is deeply resistant to rapid change, particularly when it involves job cuts. Many German workers believe, as one trade unionist recently lamented, that takeovers are being driven by a philosophy of "buy it, strip it and flip it".

To be sure, the profits currently being earned by the leading financial firms are dizzyingly high. ... Even we economists who believe that global financial innovation yields huge net benefits must admit that today’s hedge fund boom is becoming like the tech bubble. ... [I]n today’s go-go ultra-high liquidity environment, ... roughly 1,000 of the world’s 9,000 hedge funds went out of business last year.

The big question is whether this Wild West mentality poses broader risks to the global financial system, particularly given circumstances where a large number of firms are all collectively making the same bet. If they lose, a long string of bankruptcies can cut deeply into banking systems...

At the moment, the most glaring weakness is the so-called "yen carry trade". Hedge funds have borrowed hundreds of billions of dollars at ultra-low interest rates in Japan, and invested the proceeds in countries such as Brazil and Turkey, where interest rates are high.

As long as the yen remains weak, this investment strategy will be a money machine. But if the yen appreciates sharply, as it easily could given Japan’s huge current account surplus, some hedge funds will suffer huge capital losses and the yen carry trade will implode.

And while today’s main risk is the yen, in a couple months it could be something completely different. So pressure outside the US and Britain to put the hedge fund industry on a tighter regulatory leash is hardly surprising. The Germans, for example, want to reduce risk by forcing hedge funds to adhere to stricter reporting requirements.

The funds respond to such proposals by arguing that if they are required to reveal their investment strategies, they will lose their incentive to innovate, and a recent US government report — a multi-agency effort headed by Treasury Secretary Hank Paulson (formerly of Goldman Sachs) — supports that position.

Greater regulation would be a mistake, the report argues, because the global economy’s best defence against systemic risk is the exercise of common sense and "due diligence" by each and every person who invests or interacts with hedge funds.

In other words, the US is telling investors to carry their own guns, because, as in the Wild West, there might not be a sheriff around to help. But frankly, as we are reminded by recent events, it is hard to see how at least a small increase in transparency can hurt. The Germans, in chairing the G8 this year, should not surrender on this issue. ...

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Addendum d'une reflexion de la part de Lafayette (que P.-V. trouve interessante):

""Many German workers believe, as one trade unionist recently lamented, that takeovers are being driven by a philosophy of "buy it, strip it and flip it"."

Merkel, the PM of Germany, born in East Germany is dedicated to rightist principles. (She even - unwisely - backed a flat-rate tax.) This woman has NO delusions whatsoever about what the left promises (pap to the masses) and then fails to deliver (eyes bigger than their stomachs and ensuing government Debt Mountains).

But, she did not win an outright plurality in the election that voted her into office (which she had to fight tooth and nail with machos from both the right and the left to obtain). She is walking a tightrope between her instincts that tell her that economies need continuous supervision but moderate regulation and the leftists in both France and Germany who are complaining about capitalist hedge-fund "vultures".

The fact of the matter is that hedge-funds employ new management that, yes, does shuck jobs, restore financial balance ... but does inevitably rehire. still, they never rehire at the same salary levels and never the same number who lost their jobs. OTH, they save businesses from total closure ... and dead European smokestacks are a sorry sight everywhere.

In fact, what disturbs most the Germans is the same pain and anguish that bothers the French. After forty odd years of living in a cocoon, they cannot possibly fathom that the paradigm has changed forever.

Ask any Doctor/Economist; until patients/economies realize that they are sick, there is little hope that administering a remedy will be effective.

The US and Europe have the same complaint, but different reasons. Unions in Germany cannot understand that the featherbedding and over regulation of employment is a thing of the past. American unions cannot understand that high-pay low-skilled jobs are going to the Far East (far more quickly than high-paying high-skilled jobs).

Neither do politicians yet understand that in a liberal globalized economy governments no longer make the rules of the game, but must learn to obey them. Just this week, the French female candidate for President met with Merkel to suggest that the present crisis at Airbus be resolved by a government recapitalization of the company.

Again the idiot-left thinks the state should come to the rescue. (They did the same in the 1970s & 1980s when successive administrations dumped billions into saving Honeywell-Bull, the national champion of French computer manufacturers, which finally went belly up.) I am not saying that Airbus will die. But, certainly, the problem with the company is NOT refinancing inefficient production lines (shared between Germany and France) but rationalizing those lines. That means redundancies.

People cannot understand the VERY profound change in employment that the doubling of global manpower (in China, Russia and East Europe) has effected. It is a very bitter pill to swallow and there is NO QUICK FIX."