Links, Nov. 20

To be read again and ponder about.
Dani rodrik discussesMaury Obstfeld survey paper from Commission on Growth and Development in
International finance and economic growth:
Obstfeld thinks "There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries continue to move in the direction of further financial openness. ......A plausible explanation is that financial development is a concomitant of successful economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross‐border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial for developing countries. The reforms developing countries need to carry out to make their economies safe for international asset trade are the same reforms they need to carry out to curtail the power of entrenched economic interests and liberate the economy’s productive potential." Dani Rodrik does not agree "This is an interesting hypothesis, but I am not sure I agree with the final sentence. Some of the most stupendous development successes of our time have been based on subsidized credit, a certain dose of financial repression, development banking, and managed exchange rates, all of which require controlled, rather than liberalized, finance. See South Korea, Taiwan (both of them during the 1960s and 1970s), and China, in particular."

Brad Setser This is the biggest financial crisis since the depression.
Brad Setser discusses The G-20 communique"
"It also reflects another reality: agreement on regulatory changes only required a deal among the G-7 countries, not a deal between the G-7 and the emerging world."
Is the US too big to fail?:
"Why are investors rushing to purchase US government securities when the US is the epicentre of the financial crisis? This column attributes the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they handle the crisis."
Brad Setser says "The fall in demand for risky US assets was offset by a rise in demand for Treasuries and the sale of foreign assets by Americans. "
and "Of course, Treasuries aren’t entirely risk free. I don’t believe that there is a real risk the Treasury would default. Buying credit-default swap protection on the US is something by colleague Paul Swartz calls an end-of-the-world trade. But foreign investors holding long-term Treasuries are clearly taking a lot of currency risk — especially if they are buying in now, after the dollar has rallied …

The US is taking a risk too. The rising stock of short-term bills held abroad does potentially leave the US more exposed to a rollover crisis."