“Today we know that subprime lending was only a small fraction of the problem. Even bad home loans in general were only part of what went wrong. We’re living in a world of troubled borrowers, ranging from shopping mall developers to European “miracle” economies. And new kinds of debt trouble just keep emerging.
How did this global debt crisis happen? Why is it so widespread? The answer, I’d suggest, can be found in a speech Ben Bernanke, the Federal Reserve chairman, gave four years ago. At the time, Mr. Bernanke was trying to be reassuring. But what he said then nonetheless foreshadowed the bust to come.
The speech, titled “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.
In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world….”
Paul Krugman, “Revenge of the Glut”
Comment:
I don’t know where to begin with this. But I’ll try…
This is Krugman’s political bias coming into play. Yes. even professors have them. Don’t think so? Notice whom Krugman will blame for the present economic crisis – Phil Gramm (R) and George Bush (R)….and (to a smaller extent) Alan Greenspan (libertarian R)….and Bernie Madoff (D – but obviously a crook).
But he’ll say nothing about Robert Rubin (D), or Franklin Raines (D), or Barney Frank (D), or Sandy Weill (D), or any of the Clintonistas under whom the first big bubble was inflated.
Democrats also tend to be more China- hawkish than Republicans, so that accounts for the anti-Asian (read, Chinese) slant here.
In fairness to Krugman, I think the problem he points to–the chronic tendency toward overinvestment under state capitalism, the resulting lack of sufficient demand to absorb the output of overbuilt industry running at full capacity, and the excess of investment capital over opportunities for profitable investment–is a real one.
The real, terrestrial economy–the one actually making stuff–simply couldn’t dispose of its full output, even with planned obsolescence and consumer debt leading everyone to max out their credit cards and take out home equity loans to replace every damned thing they owned every five years. So obviously, investing further in plant and equipment was out of the question; it would just have exacerbated the problem. But thanks to securitization of mortgages, and other gimmicks that enabled larger and larger piles of money to buy claims on the same limited number of terrestrial assets, all that surplus capital floating around could be channelled into the FIRE economy. Worked just great, like every Ponzi scheme–until the bubble popped.
The problem is not that it’s frugal Asians, in particular, doing the saving. It’s that state capitalism’s organized on such a pathological basis (producing for the landfill and putting everybody in hock to keep the wheels of industry running at full speed) that frugality–WHOEVER practices it–will monkey-wrench the system. As the slogan in Brave New World put it, “the more stitches, the less riches; ending is better than mending.”
Krugman is fair to no one himself so he can’t blame anyone who isn’t fair to him, although I don’t think I said anything to misrepresent him. He’s extremely partisan…and very condescending. And, more to the point, he’s wrong.