It is ironic that the dollar has strengthened rather than weakened over the last year.
· The sub-prime mortgage crisis originated in the United States;
· The crisis has severely undermined the credibility of American financial institutions – both in the narrower sense that leading investment banks have now disappeared and in the broader sense that American modes of corporate governance have lost value as role models (rating agencies, accounting systems, executive compensation, and so on)
This was to be expected. It is an unseemly tooting of ones’ own horn, but — earlier this year I wrote in an article in the Milken Institute Review (vol. 10, no. 1, pages 38-45)
“The traditional pattern is most clear with the carry from the yen to the euro: it has been predictably profitable for the last five years, and this will predictably end soon, as the yen reverses its depreciation against the euro.”
In the 1955 movie version of East of Eden, the legendary James Dean plays Cal. Like Cain in Genesis, he competes with his brother for the love of his father, a moralizing patriarch. Cal “goes long” in the market for beans, in anticipation of an increase in demand if the United States enters World War I. Sure enough, the price of beans goes sky high, Cal makes a bundle, and offers it to his father to make up money lost in another venture. But the father is morally offended by Cal’s speculation, not wanting to profit from others’ misfortunes, and angrily tells him that he will have to “give the money back.” Cal has been the agent of Adam Smith’s famous invisible hand: By betting on his hunch about the future, he has contributed to upward pressure on the price of beans in the present, thereby increasing the supply so that more is available precisely when needed (by the British Army). The movie even treats us to a scene where Cal watches the beans grow in a farmer’s field, something real-life speculators seldom get to do.
Among politicians, pundits, and the public, many currently are trying to blame speculators for the recent boom in oil and other mineral and agricultural products. Are the soaring prices their fault?