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Friday, November 19, 2010

What's Happening Today? And Why Does Big Ben Hate China?

In terms of market-moving metrics, nothing. Of course, that doesn't mean that nothing's happening. If nothing else it's Expiration Friday, with everything that entails for the market.

Apparently the financial world is flipping out over China's decision to increase the reserve requirements for it's banks by 50 bps (that'll be 18% for their largest banks), effective 11/29. Why are they doing it? To suck excess cash out of the economy and try to reduce inflation. Bloomberg's got more details at http://www.bloomberg.com/news/2010-11-19/china-tells-banks-to-set-aside-larger-reserves-to-drain-cash-from-economy.html, if you want to see what's going on.

Also, Ben Bernanke spoke at the Sixth European Central Bank Central Banking Conference (redundant alliteration!) last night. The text of the speech can be found on the Fed's web page at http://www.federalreserve.gov/newsevents/speech/bernanke20101119b.htm, and the topic was "Emerging from the Crisis: Where Do We Stand?". In summary, he reviews what the European Central Banks and the Federal Reserve did over the past few years to try and prevent the end of Western Civilization as we know it, and then discusses what he sees as the lessons of the last two years:
* "Central banks and other financial regulators must be vigilant in monitoring financial markets and institutions for threats to systemic stability and diligent in taking steps to address such threats."
* "As the global financial system and national economies become increasingly complex and interdependent, novel policy challenges will continue to require innovative policy responses."
* "...in addressing financial crises, international cooperation can be very helpful; indeed, given the global integration of financial markets, such cooperation is essential."

That was one of his speeches. The other, "Rebalancing the Global Recovery" (http://www.federalreserve.gov/newsevents/speech/bernanke20101119a.htm), is the one that's been making the news for being an implicit slap against Chinese monetary policy. In it, he laments the apparent loss of common purpose (avoiding a global economic catastrophe) now that the worst of it is past, and he calls on policymakers around the world to "work together to achieve a mutually beneficial outcome - namely, a robust global economic expansion that is balanced, sustainable, and less prone to crises."

The implicit punch at China comes from several statements he makes about how "currency undervaluation by surplus countries ...inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals." His solution? "In the longer term, significantly greater flexibility in exchange rates to reflect market forces would be desirable and achievable. That flexibility would help facilitate global rebalancing and reduce the problems of policy spillovers that emerging market economies are confronting today."

In other words, if I understand his point correctly, "China needs to stop controlling its currency. It's not fair, and I'm going to sulk now."

He also advocates for the creation of an "international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole." Because, yeah. The euro consistently aligned the interests of Greece with the interests of the European Union as a whole.

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