Housing crisis' origins lie overseas

Some wisdom from the magazine Der Spiegel in Germany of all places. It places the housing roller coaster in its proper context as part of a world-wide whirligig:

The global boom of the past 10 years has been driven by three flows. First, multinational companies shipped technological knowledge and business know-how to countries such as China, India, and elsewhere in order to set up supply chains there. This "dark matter" is not picked up anywhere on the economic data, but it was absolutely essential for juicing up global growth. In return for this flow of knowledge, the industrialized world -- and especially the US -- got back a river of cheap goods and services. Finally, to pay for these imports, the US borrowed a steady stream of money from the rest of the world -- roughly $5 trillion worth since 2000.

But here's the question no one really worried about: How did this money get into the country? The federal government borrowed about $1.5 trillion directly from overseas. But most of the borrowing -- perhaps $3.5 trillion to $4 trillion worth -- flowed through Wall Street in the form of corporate bonds, equities, and exotic securities. Wall Street firms were the major intermediary between the rest of the world and US consumers. For example, firms would package subprime mortgages into a complex security and then sell big chunks to overseas buyers.

This flow of money, an essential part of the global boom, explains why Wall Street was so prosperous in recent years --and why it failed so suddenly. Bankers, hedge fund managers, and other Wall Street types would take their piece of the foreign money as it came into the US. They grew rich that way. But when it became clear that US consumers could no longer afford to carry the loans, the financial flows froze up, threatening the global boom.

Thus, the financial crisis is a symptom, not a cause. At root, this is a crisis of the entire global economy as it has developed over the past 10 years.

Comments

[Fuzzy Bear]

The global boom of the past 10 years has been driven by three flows.

There is a fourth factor as in 2002, Congress with the assistance of the Bush administration and pushed by Paulson changed the banking laws.

These were the very same laws put in place during the great depression to prevent a major failure in the banking industry from happening again.

[Brian]

It's called securitization and it's a big reason loans dryed up. Unfortunately, that's the future of banking, if they can't package and sell bad loans, they have to keep them. Therefore, we're back to 20% down and good credit scores. Doesn't look good for the, the future of, RE and auto industries.

[Sonja]

There is a fifth factor: undiscriminating Americans.

As a society, we became less concerned about the consequences where things were made. And we developed an addiction for cheap, foreign-made goods like the $29 DVD player.

For years, I have preached that we were becoming a nation that manufactures less and consumes a smaller share of our own goods.

Americans are the first to grouse about jobs being sent overseas, but not so quick to insist that their products be made domestically.

The choices that we make as consumers have a far more lasting and profound effect than the choices we make for president.

As I have said for years, we cannot thrive as a nation if our economy is based on a wobbly-stool model of selling houses and healthcare to each other and spending on the military. Sadlly, my prediction has come true.

America is like the rich, easygoing relative that the rest of the world abuses. The world takes advantage of our open markets and open borders, and generosity with foreign aid, military aid and the wildly expensive R&D efforts in the pharmaceutical industry, etc.

What does the US get in return? Markets closed to U.S. goods, unfair trade practices, dumping of commidities on our markets, and government subsdies that make our goods non-competitive overseas.

In other words, both as making bad choices as individual consumers and by letting the US be taken advantage of at the macro leve, it's no wonder we're in the shape we're in.