Friday, April 11, 2008

The Blame Game

The US financial system is in trouble, and with it the world financial system. Why?

The IMF says that the problem is that the U.S. delayed joining its financial review mechanism. Many argue that the problems are due to the lack regulation in U.S. mortgage markets, and so forth.

George Soros correctly puts the current financial crisis in the context of a longer run set of problems. Soros describes this as a 'super-bubble' that began in the 1980s and is now beginning to deflate.

Some basic principles from Trading Away Our Future:

Markets do not rapidly reach an efficient equilibrium, particularly when governments actively distort markets.

The rise of the U.S. trade deficit was aided by U.S. government borrowing, the removal of witholding taxes, and dollar mercantilism.

But eventually what isn't sustainable isn't sustained.

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