Monday, February 14, 2011

Misconstruing Geithner

David Dayen is upset because, he claims, Tim Geithner "thinks that there's a great 'financial deepening' about to take place where the demand for sophisticated financial innovations will jump. Therefore, the financial sector will need to grow and become the most reliable spur of the US economy. That's his feeling."

But is that actually what Geithner said? No, it's not. He did not, in fact, say that we need more financial innovation, nor did he say anything about the financial sector needing to become "the most reliable spur of the US economy." What he actually said, via Noam Scheiber's piece in TNR, was: (emphasis mine)

[Geithner] told me he subscribes to the view that the world is on the cusp of a major "financial deepening": As developing economies in the most populous countries mature, they will demand more and increasingly sophisticated financial services, the same way they demand cars for their growing middle classes and information technology for their corporations. If that's true, then we should want U.S. banks positioned to compete abroad.
Geithner was actually making a fairly uncontroversial point: as emerging economies like China, India, and Brazil grow, and their populations become wealther, their demand for financial services will increase. A rural Chinese farmer might need a savings account, but that's it. As China develops a robust middle class, they'll have pensions that need to be invested, they'll need financial advisors, and so on. As Chinese businesses grow, they'll have corporate treasurers who need to manage the company's cash, they'll need to raise money in the capital markets, and so on. And this is the situation that many of the large emerging economies find themselves in: their businesses are growing, and they're in the process of developing broad middle classes. (How broad or robust the Chinese government will allow its middle class to be is an open question, and I'm probably less optimistic than Geithner, but there's no question that its middle class is growing.)

Note that none of this requires any additional "financial innovation." All of the financial services I described are considered basic, traditional financial services in every advanced economy. That's why Geithner didn't say anything about "financial innovation." (In fact, the word "innovation" doesn't appear a single time in Scheiber's article.) What Geithner said was that emerging economies are going to demand "increasingly sophisticated financial services," which is unquestionably true. Like I said, most Chinese workers don't need anything beyond a savings account right now, but as they move into the middle class, they'll require increasingly sophisticated financial services — services in which, not surprisingly, many US financial institutions specialize. (And no, it's not all "Wall Street," however well that phrase may play with the crowd.)

All of this is completely uncontroversial. But because it was Tim Geithner who said it, I guess I shouldn't be surprised that commentators are actively misconstruing it as some sort of outrageous pro-Wall Street statement.

10 comments:

Anonymous said...

Central banks around the world are crushing the incentive to save via artificially low interest rates. Financial deepening requires something to intermediate, namely savings. Geithner is, therefore, wrong about the demand for financial services. The financial services industry today is about transferring wealth from savers to borrowers. There is hardly going to be a great deal of demand for this when savers realize that they have been duped.

Main Street Muse said...

As we know from the Financial Crisis Inquiry Report, "truth" is colored by the political spectrum we use to frame our "reality."

When Geithner says: "As developing economies in the most populous countries mature, they will demand more and increasingly sophisticated financial services" - you view it as a demand for traditional pensions, bank accounts and capital management needed for growing businesses.

When I hear Geithner talk about the need for "increasingly sophisticated financial services" in those growing economies, I have a horrifying flashback to the fall of '08, when the world outside of Wall Street was introduced to financial services so sophisticated, no one understood them. Not the consumers. Not the regulators. And apparently not even the CEOs of the banks who offered such "sophisticated" instruments like CDOs and CDSs.

Please let's not export such sophistication to emerging markets!

Buy RS Gold said...

Central financial institutions around the world are generally killer the particular bonus to save lots of through synthetically low interest rates. Fiscal deepening requires something in order to intermediate, specifically financial savings. Geithner is actually, for that reason, drastically wrong in regards to the interest in economic companies. The economic solutions business nowadays is all about shifting riches coming from savers to borrowers. There's hardly gonna be quite a lot of demand for this specific whenever saving bed know that they've been misled.

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Anonymous said...

Whenever Geithner suggests: "As building economiesCheap wow gold inside the most populated international locations develop fully, they may demand more in addition to ever more sophisticated personal services" -- anyone find it to be a demand for traditional pensions, bank accounts Buy rs goldalso investment capital operations essential for developing firms.

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PENNY STOCK INVESTMENTS said...

One to many wall street banksters run loose.

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