No a bad write up...
I don’t know why I called this a “simple guide to the banking crisis.” Really, it’s the longest post I’ve written here. But here it is:
Why is the banking crisis so hard to solve? We stood and watched while Hank Paulson and Ben Bernanke fumbled with their response in the fall. Now we are being treated to the distressing spectacle of Tim Geithner struggling as well to articulate a clear policy for dealing with zombie banks. How come these smart and powerful men can’t get a handle on the problem?
I want to lay out 5 simple propositions which will help you understand why the banking crisis is so intractable. Then I will explain what happens next.
Proposition 1: The boom in the U.S. was funded almost totally by foreign money.
This is absolutely the key point for understanding the current banking crisis. Historically, households have been the major source of capital for the U.S. economy. That’s certainly what I was taught in economics graduate school.
But that quietly changed in 1999, when American households flipped from being net lenders to being net borrowers. Foreign money became basically the only source of capital for the U.S.
Take a look at the chart below, which charts net financial investment (adjusted for inflation). Net financial investment for households (the blue line) includes additions to savings and checking accounts, purchases of stocks and mutual funds, and additions to corporate and government pension funds, while subtracting the growth in household mortgages and consumer credit.
Read more...
Cheers
Marc
I don’t know why I called this a “simple guide to the banking crisis.” Really, it’s the longest post I’ve written here. But here it is:
Why is the banking crisis so hard to solve? We stood and watched while Hank Paulson and Ben Bernanke fumbled with their response in the fall. Now we are being treated to the distressing spectacle of Tim Geithner struggling as well to articulate a clear policy for dealing with zombie banks. How come these smart and powerful men can’t get a handle on the problem?
I want to lay out 5 simple propositions which will help you understand why the banking crisis is so intractable. Then I will explain what happens next.
Proposition 1: The boom in the U.S. was funded almost totally by foreign money.
This is absolutely the key point for understanding the current banking crisis. Historically, households have been the major source of capital for the U.S. economy. That’s certainly what I was taught in economics graduate school.
But that quietly changed in 1999, when American households flipped from being net lenders to being net borrowers. Foreign money became basically the only source of capital for the U.S.
Take a look at the chart below, which charts net financial investment (adjusted for inflation). Net financial investment for households (the blue line) includes additions to savings and checking accounts, purchases of stocks and mutual funds, and additions to corporate and government pension funds, while subtracting the growth in household mortgages and consumer credit.
Read more...
Cheers
Marc