Greenspan had his hands tied

Is the US dolar exchange rate free to float? According to an HBS professor, its not. Let me explain. The Chinese central Bank (as well as other many Asian Central Banks), buys a very large amount of US T-bills to accumulate foreign reserves. This as well pemits the Chinese Central Bank to maintain its currency, the yuan, devaluated. This allows the Chinese to continue exporting at very low prices. This spurs Chinese growth. The demand for US T-bills allows the US to keep its interest rates low and hence push consumption forward. This impedes the US to have its own monetary policy. So for everyone that thinks that the crisis is Greenspan's fault, think again. He did not cuse it and could not impede it. The crisis was caused by the fact that subprime mortgages were not paid, which made mortgage backed securities to fail, which made banks go broke. The US and you may read in a post below, was running (and still does, since the government is spending so much, and the Chinese Central Bank still buys T bills) a Ponzi scheme. The effects of the crisis are just being pushed forward in time, if policy is no adequate, we might be facing a great depression.

Dubai

Doubts arise around Dubai's financial strength...

check this out:
http://www.nytimes.com/2009/02/12/world/middleeast/12dubai.html?pagewanted=1&_r=2&em

you're in for a shocker!

Or maybe...

This might be the reason for the financial crisis...

http://www.businesspundit.com/sub-prime/

Enjoy!

The financial crisis

As an economist, people have often asked me why is the financial crisis ocurring. The answer, in the end, is pretty simple. Let's reduce the problem to a single person. When one has too many debts, so that they are impossible to pay and one continues to get more indebted to be able to pay the last debt, so that one is everyday more indebted, eventually the people or banks who we owe money will realize we cannot pay them back. This is known as a Ponzi scheme, such named in honor of Carlo Ponzi, an Italian immigrant who was the one who originated such schemes. Any pyramid scheme in the end is a Ponzi scheme...if you know who Bernie Madoff is, you know the granddaddy of all Ponzi schemes...at least on a micro level.

On the macro level the biggest Ponzi scheme has just recently fell before our eyes. The US was mantaining (yes the US as a country, as a whole) a level of debt towards the whole world that it couldn't pay. The debt became bigger, and bigger, and credit in the US was ever flowing: credit cards, second and third mortgages, financial plans to pay new cars; and the debt got bigger, and the world (China, Mexico, Japan, etc.) continued to lend money to those people that had several mortgages and 5 credit cards (a Visa, a Mastercard, an American Express, a Diner's club, and your local department store credit card) rocketing to the limit.

The Ponzi scheme fell: the debt became unpayable,big banks declared bankrupcy...and credit crunched, and the worst crisis since the Great Depression hit the world. Incentives were ill aligned: banks pushed credit, and people wanted to consume more...so it was, human nature.

Should there be more regulation? Personally I don't think its the way to go, better regulation rather than more is probably the answer.

Will we get out? How and when will we get out? Now those are the difficult questions.