[Reader-list] FINANCE: International finance multiplier

[Naeem Mohaiemen]

There's no "we told you finance fuckers" satisfaction to be had from
the continuing grim news. The whirlpool will end up sucking everyone
in. Hence "international finance multiplier" and linkages that now
cannot be unravelled. And Krugman said last Friday "we are going over
the edge". Grim, grim, grim.


The international finance multiplier
- Paul Krugman's blog

Back in the day, economists used to talk about the foreign trade
multiplier — international business cycle linkages via flows of goods
and services. The basic idea was that since one country's imports are
other countries' exports, a recession in one country would be
transmitted to the rest of the world as slumping demand here led to an
export plunge abroad.

That's not what's happening now, or at least not yet. We're
experiencing a global crisis, but a different kind of linkage is at
work — call it the international finance multiplier. It operates
through the balance sheets of highly leveraged financial institutions,
which do a lot of cross-border investment. When these institutions
lose heavily in one market — say, US mortgage-backed securities — they
find themselves undercapitalized, and have to sell off assets across
the board. This drives down prices, putting pressure on the balance
sheets of other HLIs, and so on.

And so a crisis originating in Florida condos and San Diego McMansions
is causing havoc for Greek banks. Financial globalization, it turns
out, means globalized financial crises.