aussieavodart said:
Whose responsible for the latest economic disaster?
Although that is how history will probably record the events in the financial world, that's not really a fair assessment.
Yes there was a real estate bubble in the US, but it was one of MANY bubbles that have been created over the past decades, by institutions all over the world. It just so happens that the US real estate bubble was the FIRST bubble to pop, it was the trigger, but in actuality this trigger could have been ANY of the existing bubbles... the Baltic bubble, the Eastern Europe bubble, the China bubble, the Southern Europe and UK property bubble, etc.
Although US banks were the first to approach failure, European banks had actually engaged in FAR more speculative practices now that the light has been shined on their balance sheets. Basel reserve ratios are supposed to be in the neighborhood of 12 to 1, that is, 12 dollars lent to every 1 dollar in reserve. US banks, after they lifted their kimonos, were operating at a highly leveraged 20 or 30 to 1 ratio... but European banks have been operating at 50 to 60 to 1 ratios!
It might very well have been the Icelandic banking system, which has been operating like one giant hedge fund, that failed first... in which case, would you "blame" Iceland for "causing the economic crisis"?
The roots of this crisis can be found in overly speculative banking practices and bubbles that have been growing all over the developed economies, in many nations.
Why have these bubbles formed? There are many schools of thought here, but at the crux of the matter I believe that this crisis has its root cause in globalization. Before the advent of a lot of the new technology we now have, the global economy used to be a more loosely interconnected patchwork of local economies. Economies could be regulated more effectively by sovereign governments due to the function of size. But, as electronic interconnectivity became more immediate, and as the global transportation infrastructure became more efficient, you now have the ability to perform economic transactions REAL TIME between players on different sides of the planet. Capital markets shifted from nationally-based markets, to a global market.
So... you HAD, as an example, a US economy that had certain unique characteristics... unique behavior in terms of saving and spending, unique behavior in terms of regulatory framework, working conditions, wage and benefits expectations, and a unique set of pricing expectations. Alongside this, you had, as an example, a Chinese economy with its own unique characteristics, regulatory frameworks, and pricing. Same goes with the Middle Eastern economy, and the multitude of European economies.
What we have seen in the past few decades is the globalization of these economies. And as these economies were operating in completely different paradigms, as technology "makes the world smaller", you have a disorderly collision, and all manner of economic arbitrage going on. This has made it possible for people to make millions just playing the arbitrage! You have financial operations who make big money JUST playing the carry trade with the Yen, as an example... no economic value really being added, just taking advantage of imbalances between the characteristics of one market and another market, and earning profit on the arbitrage yield!
As banks are in competition with each other, they need to find excess capital and deploy it to places where capital is needed as a matter of survival.... and this process has gone global as well. The PROBLEM is that you soon reach a point where the arbitrage opportunities run short, as the markets themselves need to find a new GLOBAL equilibrium. This is the process we are in right now.
As an example, you have your average Chinese person from, say, a decade ago who was making $5 a week in a manufacturing plant, riding his bike to work every day. On the other hand, you have an American worker who is making $50,000 a year, plus health care, on a manufacturing line here in the US. As globalization intensifies, it becomes inevitable that there will be a reckoning of sorts between these two people's lives and lifestyles. This is not an orderly process, and has manifested itself in all sorts of bizarre imbalances and bubbles that need to be popped as time goes by.
