Krugman and the Giant Pool of Money
Paul Krugman explains that what the world is seeing is a global savings glut where the world's savers were looking for a place to invest their money.
[Bernanke's] 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.
The result was a world awash in cheap money, looking for somewhere to go.
NPR's Money Planet found the same root of this crisis which they talked about in the program, The Giant Pool of Money. As Adam Davidson introduced the problem:
The global pool of money. That's where our story begins. Most people don’t think about it but there’s this huge pool of money out there, which is basically all the money the world is saving now. Insurance companies saving for a catastrophe, pension funds saving money for retirement, the central bank of England saving for whatever central banks save for. All the world’s savings.
Krugman warns that the global savings glut is still out there, waiting to find investments in which to fund, but there's a problem:
One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.
Krugman also notes that the other essential piece that made this crisis so bad was the greed of the financial industry:
[Y]ou could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.
As Krugman says, this crisis affects more than just the unwise homeowner, it has cost entire regions and industries their wealth and prospects - all because Wall Street decided it would be good to get a piece of that pie. And we still don't know how to escape this mess.