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Paul Krugman writes for the New York Times.
Paul Krugman: Economic crisis has deeper roots than once believed
Tuesday, Mar. 3, 2009 Page 13A
Remember the good old days, when we used to talk about the "subprime crisis" – and some even thought that this crisis could be "contained"? Oh, the nostalgia! 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? Bernanke cited "the depth and sophistication of the country's financial markets" (which, among other things, have allowed households easy access to housing wealth). Depth, yes. But sophistication? Well, you 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....
Nor is the damage confined to the original borrowers. In America, the housing bubble mainly took place along the coasts, but when the bubble burst, demand for manufactured goods, especially cars, collapsed – and that has taken a terrible toll on the industrial heartland. Similarly, Europe's bubbles were mainly around the continent's periphery, yet industrial production in Germany – which never had a financial bubble but is Europe's manufacturing core – is falling rapidly, thanks to a plunge in exports.
If you want to know where the global crisis came from, then, think of it this way: We're looking at the revenge of the glut.
And the saving glut is still out there. In fact, it's bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.
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.
So that's how we got into this mess. And we're still looking for the way out.
Then the big mortgage banks, the last stop in guaranteeing mortgages, started to go under. The two huge state-supported U.S. mortgage banks, Freddie Mac and Fannie Mae—responsible for more than $5 trillion in mortgages—had to be nationalized, along with the world's largest insurance company, AIG.
Banks which had previously handled trillions in investments were finding that they were becoming insolvent almost overnight. Because of the global reach of these companies, this became a crash even more severe than the series of banking failures that led to the Great Depression in the 1930s.
This financial crisis has spread through the entire banking structure of the West. It has moved from a crisis of insolvency to a crisis of confidence in the banking system—everyone wants their money out because no one trusts their banks. The essential trust that allowed the goldsmiths to lend on the basis of their borrowed gold has begun to evaporate.
The International Monetary Fund warned that the world!
Ted Rudow III,MA