Blaming the pushers?

Okay, commenting on global finance is really not my usual shtick, but I’ve got to agree with Barry Ritholtz that there’s something odd in this NY Times article on China’s role in the U.S. housing bubble.  The article describes Ben Bernanke’s 2005 theory that a savings “glut” is driving up the demand for American to borrow from foreign countries.  The article extends the theory to suggest that the financial mess that we are currently in the middle of was, essentially, caused by the Chinese.

Okay, it is true that as a country, we were essentially borrowing money from overseas in order to buy overseas products.  Essentially, borrowing from the Chinese in order to buy their stuff.  The mechanisms were somewhat complicated, home owners typically were borrowing from their homes.  As home prices rose, due to low rates and bubble psychology, people found that they could refinance their homes or take out home equity lines of credit that could then be used, not for home improvements, but for general lifestyle expenses.  Since median incomes have not risen in a decade, this isn’t too surprising.  (As an aside, I was in a conversation last week with someone who claimed that the whole recession could be over if the news would act as a good propaganda arm and declare that it was.  People would start spending and the economy would get moving.  I pointed out that he was wrong because most of the capital financing the economy was borrowed from homes, etc., and that wages hadn’t increased.  In other words, the consumer has no money to restart the economy.  He had to agree that was true.)

So, I agree that China (and other foreign countries) were necessary to the bubble, but does that mean that their “excess” savings caused it as the article implies?  No, there are more than a handful of things wrong with the article:

  1. It takes an uncritical look at the idea there is a savings glut.  I didn’t note any refutations of Bernakne’s thesis.
  2. The article’s URL ends in “26addiction.html” and in a single word, it sums up much of the article.  But this is a sad sort of exculpation for the U.S.  Sticking with the same metaphor, it’s arguing that the a drug dealer is responsible for all of the actions of a junkie and the junkie bears no responsibility.
  3. Switching from the “addiction” metaphore, it’s bad supply-side theory applied to credit.  Okay, it’s true that lower rates will attract more demand from the pool of potential borrowers.  And I’ll buy that having more creditors will drive down rates.  But that’s not what happened here.  In this case, Greenspan artificially held down lending rates through the Federal Reserve.  In other words, it wasn’t a supply-side rate cut driving up demand, it was an artificial rate cut that drove up demand and the Chinese stepped in to meet that demand.
  4. Probably more than anything else, I find the idea that there is a savings “glut” in the rest of the world (particularly China) particularly annoying.  It completely disregards recent history.  Savings imbalance, I’ll believe.  But to suggest that the Chinese are saving too much is completely loony.  At the same time Bernanke was saying that others were saving too much, the U.S. savings rate fell to 0%.  If there’s an imbalance, it’s more likely that the U.S. was to blame for increasing its borrowing.
  5. Finally, there are all sorts of little oddities in the facts and nuance of the article.  For example, there’s a general feel of “red-baiting” to the article. Or that the article notes that the Chinese now hold $2 trillion in U.S. debt, out of the, what, $11 trillion in debt we’re in now?

I do agree with the article that it would be good if China stopped pegging their currency to the dollar.  But I’m not certain how much it would help the problem being discussed here.  It might make us less likely to borrow from the Chinese, but at the same time, I don’t think it would have decreased overall U.S. borrowing.

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