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.

No comments:

Post a Comment