Mr. Greenspan has changed his mind

Central Banks can influence to federal funds rate, overnight lending rate of depositary institutions to another depositary institutions, this would indirectly influence to lending rate of banks. The Federal Reserve of the U.S kept interest rate below 2.5% from 2001 to 2005, the results were as expected: borrowings of consumers, speculators and homeowners started growing at high pace. For example, households borrowed $4.4 trillion in total including mortgage and other types borrowings.

Cost of borrowing was too low, the U.S economy was flooded with cheap money, consumers were spending more than they earned. Corporation were taking any investment with return exceeding the cost of borrowing. On the other hand, speculators were investing in stock with return exceeding cost of money. The lower interest rates allowed refinancing of mortgage loans, the burst of housing bubble cause by excessive investing and irrational behavior have caused the bubble.

As governor of the Fed, Mr.Greenspan kept interest rate low and encouraged irrational behavior in stock markets and corporate management.

Mr. Greenspan is putting blame on regulators. I wanted to state his own words.

"Risks in financial markets, including derivatives markets, are being regulated by private parties," Greenspan said on Capitol Hill 1994. "There is nothing involved in federal regulation per se which makes it superior to market regulation." Nevertheless, Mr.Greenspan is playing another "song" now, I guess someone has to remind his point of view 15 years ago, which caused current global financial crisis.

Trade Imbalances and Trade Disequilibrium

When the U.S treasury secretary Tom Geithner accused the Chinese government for manipulating the yuan, the Chinese government responded negatively. Barack Obama imposed 15% tier tariff on Chinese products, free trade started struggling. The free trade proponent government started protectionism and trade war.

What are the impacts of the undervalued yuan on global economy? Generally, the Chinese economic growth heavily depends on exports, and it has several advantages: lower wages, manufacturers have easier access to loans, yuan is undervalued.

The greatest advantage of the Chinese companies is undervalued currency, meaning Chinese products are cheaper and more competitive in global markets. The government has the largest trade surplus with the U.S.

The Chinese government heavily invested in T-bills, because abroad earned foreign currency appreciates local currency once it brought to China and converted to yuan. The amount of the yuan would decrease and value would increase, this will eliminate competitive advantage of Chinese products overseas.

Currently, the Chinese government holds around $800 billion T-bills, and it's providing fund to the U.S government to finance it's deficit. If the U.S makes pressure to China to appreciate the yuan against dollar, what would be the consequences? Who is holding over whom, China or the U.S.

In this case, the U.S is winner. Assume, if China decides to dump its T-bills, it would depreciate the dollar and China will be the loser. In addition, the Federal Reserve of U.S can just buy them and hold, it would depreciate the dollar, again China will loose the game.