24 January, 2008

Money flows 'round the globe; where it stops, no one knows

Investors are finding out what factory workers learned long ago: Globalization isn't always their friend.

That's evident when people pay so much attention to plunging stock markets in places such as Frankfurt and Shanghai, and when the Dow Jones Industrial Average drops "only" 128 points, as it did Tuesday, after being down 465 early in the day after the foreign sell-off.

In the long run, free trade and international investment can promote wealth, create middle classes and foster democracy. Nonetheless, it's hard to look at today's international economy and markets and not wonder whether something's seriously amiss.

investors send vast amounts of money around the world, placing bets on things they might not fully understand — the turbocharged U.S. housing credit market, complex derivatives and frothy emerging markets, to name a few. This unfettered flow of capital has outstripped governments' ability to discourage foolhardy speculation, or even to provide a decent amount of transparency on what is being invested where.

In recent months, the Federal Reserve has taken a more interventionist approach, enacting emergency interest rate cuts, such as Tuesday's three-quarters of a point reduction, and adopting new rules on lending.

That's a good start. But in a world in which banks can have billions of dollars of potential losses hidden in "structured investment vehicles" and other esoteric securities, these actions seem minimal. In many developing-world markets, it's even harder for investors to know what they are getting into.

Millions of U.S. investors have been learning a lesson about these risks. They've been pouring money — 401(k) and otherwise — into international stocks and mutual funds in search of higher returns and greater diversification. But the relentless downdraft in markets virtually everywhere demonstrates just how undiversified the world has become.

The U.S. housing slump is dragging down European banks that invested in dubious mortgage-backed securities peddled by Wall Street. Asian economies, which had supposedly been maturing and becoming less dependent on the United States, have been sent into a panic over the thought that a recession might be imminent here. And markets everywhere rebounded when the Fed announced the latest rate cut.

For all the talk about growth in the developing world being "decoupled" from the United States, it's the global economy, stupid. And everyone's in this mess together.

(From USA today)

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