Greenspan speech;
... increased demand for dollar assets may lower interest rates and equity premiums in the United States ...
Aargh! Higher foreign savings coupled with declining home bias translates to lower real returns.
Help! Import quotas for capital! Legislated minimum real returns! Do you think lil ol me can survive in a world of global capital flows? Compete against a global pool of full time talent?
>>Will they lend us more money in the future?
I hope not. They are pushing interest rates down, and I would like a fair return on my savings if I'm going to live without a speedboat, or $150/pair of Nikes.
Message 19475301
More on 'Home Bias' from Greenspan;
How much further can international financial intermediation stretch the capacity of world finance to move national savings across borders?
A major inhibitor appears to be what economists call "home bias." Virtually all our trading partners share our inclination to invest a disproportionate percentage of domestic savings in domestic capital assets, irrespective of the differential rates of return.
People seem to prefer to invest in familiar local businesses even where currency and country risks do not exist. For the United States, studies have shown that individual investors and even professional money managers have a slight preference for investments in their own communities and states. Trust, so crucial an aspect of investing, is most likely to be fostered by the familiarity of local communities.
As a consequence, home bias will likely continue to constrain the movement of world savings into its optimum use as capital investment, thus limiting the internationalization of financial intermediation and hence the growth of external assets and liabilities.8
Nonetheless, during the past decade, home bias has apparently declined significantly. For most of the earlier postwar era, the correlation between domestic saving rates and domestic investment rates across the world's major trading partners, a conventional measure of home bias, was exceptionally high.9
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The decline in home bias probably reflects an increased international tendency for financial systems to be more transparent, open, and supportive of strong investor protection.10 Moreover, vast improvements in information and communication technologies have broadened investors' scope to the point that foreign investment appears less exotic and risky. Accordingly, the trend of declining home bias and expanding international financial intermediation will likely continue as globalization proceeds.
10. Research indicates that home bias in investment toward a foreign country is likely to be diminished to the extent that the country's financial system offers transparency, accessibility, and investor safeguards. See Alan Ahearne, William Griever, and Frank Warnock, "Information Costs and Home Bias" Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 691, December 2000. Return to text
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