What I find interesting is that [capital flows are not] actually a feature of most economic models. At least until recently, financial economists didn’t focus on balance sheets. There’s been lots of sophisticated work on the determination of exchange rates, asset prices more generally, risk premiums. But they often didn’t take account of balance sheet measures, or the composition of the balance sheets of households, firms and the government. – Vincent Reinhart
It would seem that, like liquidity, economists tend to disappear just when you need them most.
So this week Vince welcomed U Virginia dismal scientist Frank Warnock to his "No Way Out" team, and we’ve been busy in the dungeon transcribing the chatter. So far we’ve coded Vince’s intro and Frank’s presentation, and there’s already been some pretty good stuff.
Frank sounded positively disappointed that his specialty, global economic imbalances, had not yet caused any major systemic catastrophes. However, he perked up a bit at the thought that this might happen over the next little while 
John-
I suspect a lot of folks wonder what in heck global imbalances have to do with the housing market, but I think to some extent, it’s the heart of the problem. Until the imbalances stabilize, I don’t believe the economy, and by extension the housing market, will stabilize.
Warnock spoke about where the big investors want to park their money, but I think we need to consider where that money comes from. To a large extent, it’s consumer spending.
Here’s the gross oversimplification as I see it.
It had been the hope of Greenspan and the Beltway that we could replace manufacturing jobs with lucrative high tech. Our bubble burst though through rampant speculation and jobs moving overseas- something that in our arrogance we didn’t think would happen.
We reinflated and decided that we’d have around a quarter of our economy tied to housing. We borrowed a lot of money to make that happen. This time the bubble pops, but the jobs don’t go overseas- it’s hard to import houses, and we don’t need any more anyway. Foreigners like our “economic miracle” though, and overbuild homes as well.
After years of addiction to borrowing, the government is not addressing the core problem. We can’t keep borrowing money from abroad to purchase stuff we don’t need or want any more, and our unemployment is rising.
The short simple answer seems to be that we should make the stuff we need ourselves rather than buying the basics from overseas and producing superfluous stuff at home. That’s a tough solution to make happen though.
We tried protectionism to boost U.S. industries during the Great Depression, and that was a dismal failure. It appears that Bernanke and Co. want to trash the dollar and make U.S. exports more attractive that way. That’s not going to work either.
We are going to have to be competitive in the global economy, and that’s tough when we are competing with competitors overseas that make a tenth of what we do.
That’s going to mean a huge drop in our lifestyle quality. I don’t mind it if people have to board up the McMansions, give up the Hummers and live a simpler lifestyle, but it’s going to be awful if we just have a bigger gap between the prosperous and the poor. We have a serious risk of turning into a banana republic here.
I don’t think massive regulation is going to get us where we need to be. Central planning failed in the U.S.S.R. and there’s no reason to think it will do better here.
Our national housing stock is not suited to our needs. It remains overpriced, often badly located and oversized for current needs. Until our economy and jobs sort out though [And the government quits trying to manipulate a housing market it doesn't understand.] housing will not sort out, stabilize, grow green shoots or what have you. We will merely have an artificial, highly subsidized market.
In short, global imbalances are terribly important to sorting out our economy and our housing market.
Igor’s saying “phooey”, so I guess I’d better climb off the soapbox.