They Made Us Do It

I promise to keep this one shorter.

This afternoon, Dave and I were discussing something his professor had said in class about the sources of the financial crisis. To summarize a summary (I wasn't in the class, so Dave is invited to correct my presumptuous ass), the unnamed professor pointed out that a great deal of blame for this whole mess should be placed at the bounded feet of the Chinese. By pegging their currency at an artificially low level through massive purchases of U.S. treasury bonds, the United States was drowned in an ocean of cheap money which allowed too much investment and too much spending to occur too quickly with too little oversight or forethought.

I've seen this argument before. In a New Yorker article on Ben Bernanke, John Cassidy portrays the chairman as a soft-spoken, gee-is-he-a-nice-guy but a bizarrely dogmatic chamption of, among other theories populur within the administration, the notion of a so-called "global savings glut." As I paraphrased before, this is basically the idea that the Chinese (with a devalued currency) were saving "too" much, which allowed the U.S. to spend "too" much. Without knowing too much about it, I was struck while reading the article at the convenience of the argument. Perhaps oversight was lax in the U.S., yes, and perhaps interest rates were held too low by the Fed, and mabye in retrospect it wasn't quite such a good idea to deregulate such a vast segment of the financial and banking industry, but it isn't our fault or that of any of our ideological predecessors. It was the Chinese. If you leave bacon on the living room floor, you can't blame the dog for eating it.

But this seems like a bit of a cop-out. Yes, the Chinese government allowed interest rates in the U.S. to fall (which not only exacerbated silly lending in the real economy, but also drove many of the poorer financial choices as investment banks sought out higher yields and finding them in riskier bonds and instruments), but U.S. montetary authorities slurped up that liquidity with the eagerness of a paid professional. And given the hatchet that has been tearing into the aeorta of the financial regulations and taxcodes of America since the late 1990s, as the blog post which provided the imputus for this one writes,

"Maybe it's time to revisit the "saving glut" hypothesis, and say that perhaps capital [was] "sucked" into America, rather than "pushed""(Source: Econbrowser)

I didn't write this post as a "fuck you" to a professor whom I've never met. I just meant to take his point, summarized by Dave and taken out of context by myself, and add to it: while China (and any other implausably wealthy "developing" countries you might wish to blame) have perhaps* been the pushers in the international trade narrative of the financial crisis, the U.S. has consistantly and unapologetically played the role of the ichy-skinned, lice-ridden, toothless adict. In international economics it takes two to make frottage cheese.

*There is also the possibility that the imbalance is fundamentally not a matter of excess supply (of savings in China), but one of excess demand (for more borrowing in the U.S.). Throughout much of the 19th century, it was generally believed that "supply creates its own demand," otherwise known as Say's Law, a theory considered by most non-loonies to be a theoretical relic, put out of its misery by John Maynard Keynes sometime during the 1930s. Is the savings glut hypothesis just an international capital market version of Say's Law. A more coherent, concise critique:

"I think that the conventional wisdom is more plausible: there is a savings scarcity in the United States, driven largely by the federal budget deficit, and it is this savings drought in the United States that has been sucking in excess savings from the rest of the world for most of the past five years. What about the low interest rates? In my view, the low interest rates are more the function of expansionary monetary policy, and corporate savings at home, rather than excess savings abroad."(Source: Econbrowser)