The revenge of excess

Do you remember the old days, when we talked about the "mortgage crisis?" subprime", and some even thought that this crisis could be "stopped"? Oh, the nostalgia!

Today we know that loans subprime They were only a small part of the problem. Even bad mortgage loans overall were only part of what went wrong. We live in a world of troubled borrowers, from shopping center developers to European economies miraculous. And new types of debt problems continue to arise.

How did this global debt crisis occur? Why is it so widespread? I would argue that the answer can be found in a speech given four years ago by Ben Bernanke, the chairman of the Federal Reserve. Back then, Bernanke was trying to be reassuring. But even so, what he said then already foreshadowed the disaster to come.

The speech, titled The global savings glut and the current US current account deficit, offered a novel explanation for the rapid rise of the US trade deficit in the early 21st century. Bernanke maintained that the causes should not be sought in the United States, but in Asia.

He pointed out that, in the mid-1997s, emerging Asian economies had been large importers of capital and had borrowed money abroad to finance their development. But in the wake of the Asian financial crisis of 1998 and XNUMX (which seemed tremendous then, but pales in comparison to what is happening now), these countries began to protect themselves by amassing huge amounts of foreign assets as reserves, but What they were actually doing was exporting capital to the rest of the countries. The consequence was that the world was flooded with cheap money looking for a place to go.

Most of that money went to the United States, hence its gigantic trade deficit, because the trade deficit is the other side of capital inflows. But, as Bernanke rightly pointed out, money also flowed to other countries. Specifically, some small European economies recorded capital inflows that, although in absolute numbers were much smaller than those that flowed into the United States, were much larger in proportion to the size of these economies.

Even so, much of the world's excess savings ended up in the United States. Why? Bernanke cited "the depth and complexity of the country's financial markets (which, among other things, have allowed families to easily access money from the real estate market)." Depth, yes. But complexity? Well, you could say that American bankers, confident after a quarter-century of liberalizing zeal, led the world in finding complex ways to get rich by disguising risk and deceiving investors.

And very open and poorly regulated financial systems were the characteristic of many other recipients of large capital inflows. This could explain the almost eerie correlation between conservative praise two or three years ago and the current economic disaster. "Reforms have turned Iceland into a Nordic tiger," proclaimed a Cato Institute report; How Ireland has become the Celtic tiger was the title of a Heritage Foundation article; The Estonian economic miracle It was titled another. These three countries are now going through a deep crisis.

For a time, the massive flow of capital created an illusion of wealth in these countries, just as it did for American homeowners. Asset prices were rising, currencies were strong, and everything seemed to be going great. But, sooner or later, bubbles always burst and yesterday's miraculous economies have become today's lost cases, countries whose assets have evaporated, but whose debts remain very real. And these debts are an especially heavy burden because most of the loans were denominated in currencies of other countries.

And the damage is not limited to the original borrowers. In the United States, the real estate bubble occurred mainly in coastal areas, but when it burst, demand for manufactured goods, especially cars, plummeted, and that has taken a tremendous toll on the heart of the industrial sector. Similarly, Europe's bubbles were mainly on the continent's periphery, although industrial production in Germany (which has never experienced a financial bubble, but is Europe's industrial core) is falling rapidly due to sinking exports.

If you want to know where the global crisis comes from, put it this way: we are looking at the revenge of excess.

And the excess savings is still there. In fact, it is greater than ever, now that impoverished consumers have rediscovered the benefits of frugality and the tree property market, which provided a safety valve for all that excess savings, has gone down the drain around the world.

One way of looking at the current international situation is to think that we are suffering from a savings paradox on a global scale: all over the world, the amounts that people want to save exceed those that companies are willing to invest. And the consequence is a global depression that leaves everyone worse than they were. This is how we got ourselves into this mess, from which we continue to look for a way out.