Date: 2008-03-24
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Top economists will meet April 11-12 in the La Feliz Room of the UCSC Seymour Center for the annual conference of the Santa Cruz Center for International Economics (SCCIE), which this year will focus on global liquidity. Dooley, a professor of economics at UCSC, will deliver the keynote address entitled "Is the sub-prime crisis the end of Bretton Woods II?"
(Media-Newswire.com) - Michael Dooley, a leading proponent of global financial integration, will give the keynote address during the gathering of high-level economists that takes place each spring at the University of California, Santa Cruz.
Top economists will meet April 11-12 in the La Feliz Room of the UCSC Seymour Center for the annual conference of the Santa Cruz Center for International Economics (SCCIE), which this year will focus on global liquidity. Dooley, a professor of economics at UCSC, will deliver the keynote address entitled "Is the sub-prime crisis the end of Bretton Woods II?"
Dooley's talk is sure to spark heated debate among those attending the conference, some of whom do not share his optimism about the degree to which China, Brazil, and other nations are financing U.S. debt, predicted SCCIE codirector Joshua Aizenman, a professor of economics at UCSC and a consultant to the central banks of Korea, Argentina, China, and other global institutions. Proceedings of the SCCIE conference will be published in a forthcoming issue of the Review of International Economics. The September 2007 special issue of the Journal of International Money and Finance featured papers presented during SCCIE's fall 2006 conference.
"Global liquidity is at the heart of everything right now," said Aizenman, noting that the conference will bring together leading scholars to discuss the implications of integrated financial markets. "The trend for the last 20 years has been globalization, but the big surprise is that relatively poor countries like China and Korea have started to finance richer countries, notably the United States."
Today, China, Brazil, and other emerging markets have amassed huge reserves, mostly in the form of U.S. government bonds, noted Aizenman. "We need to understand the process--if it's a win-win, or if there is tension generated by this," he said. "It's debatable."
Among economists, some are optimistic that global integration is good for all, while others are more skeptical. Referring to himself as "agnostic," Aizenman said he "can see a darker side to this."
"While these events allowed the United States to finance its growing current account deficit at a relatively low cost, it put in motion forces that may destabilize the global economy, especially if the United States would overplay its ability to access cheap global credit, thereby magnifying vulnerabilities to subprime loans," said Aizenman.
In his view, the United States has become the "consumer of last resort" for products made overseas, generating demand for "gadgets and goods" that has prompted other countries to produce. "But only the United States is playing this role," he said. American purchasing power has been boosted by appreciating real estate values, which are now falling in the midst of the sub-prime mortgage crisis, weakening aggregate demand in the United States, he added.
Like the East Asian financial crisis of 1997-98, the U.S. mortgage collapse is sending shock waves around the globe. "The new twist of recent years is that everybody is exposed to similar dynamics," said Aizenman, expressing optimism about the U.S. economy's ability to withstand the current strain. "It was a much deeper crisis in East Asia, and within two years, that was almost history. We have much better institutions and policies in place, but the downside is that our exposure to nonperforming loans is greater now. With luck, it will take one to two years to mend some of our excesses. I hope we will learn an important policy lesson: Greater financial globalization implies the need to be more assertive in dealing with moral hazards and other pre-existing domestic distortions."
The question today should not be whether the United States is headed for a recession, stressed Aizenman. "A good fraction of the U.S. economy is already in recession, and another fraction is not and is going to escape it," he said. The information technology sector, for example, is part of a global market that will protect Silicon Valley from the full impact of a downturn that will hit other sectors more severely. The impact of the real-estate downturn will also vary by region, he said, observing that, "Vallejo is in recession," while home values in other parts of the state haven't dropped as dramatically.
Dooley and other economists emphasize that the United States has an "irreplaceable" role in the global economy, and they view the current strains as "a small glitch," said Aizenman, who takes a more nuanced view of what's happening.
"The United States is still the dominant economic power, but if we're overexposed by over borrowing, there will be an adjustment, and we will play a more moderate role," he said, noting that U.S. borrowing has already dropped from a peak of about 6.5 percent of gross domestic product (GDP) two years ago to below 5 percent of GDP today. "Six percent is unsustainable, so we're growing at a much slower rate. We’re adjusting because we didn't have a choice."
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