When I came across this article by CNBC, "China—Not Wall Street—Caused 2008 Crisis: Study" written by Liza Jansen which is based on a study conducted by Erasmus Research Institute of Management, I thought to myself, "This must be a huge scandal!". But apparently, China was just being prudent with their money. Whether it was a national policy or a cultural difference, I couldn't tell ya. It basically goes like this:
- US relaxes monetary policies during the beginning of the decade
- American consumers spends more, which drove imports from China
- China grows but also saves more as a percentage of GDP relative to Germany and the US, which is then used to buy huge amounts of fixed income securities, which further drove interest rates lower from 2004 and on
- Downward pressure on interest rates accelerated even more spending and borrowing, which eventually led to the collapse of the housing bubble
One of the reasons that CDOs are believed to have played a smaller role in this debacle is because of its makeup of new mortgages:
According to the study, mortgages with those special features — like mortgage-backed securities and CDOs — accounted for less than five percent of the total number of new mortgages from 2000 to 2006.
While this article does have an eye-grabbing title, the thesis borders on the line of credulity. I'm no policy analyst, but can you really blame a nation for saving too much? Perhaps you can. Without actually seeing the report, it would be difficult to form an opinion on these findings, but it does pose for some food for thought. One thing's for sure, the financial crisis does seem to have stemmed from much earlier beginnings in 2000 (including the tech bubble). All in all, examination of all constituents of the financial crisis would be wise, and I look forward to any confirmations on these findings.
What do you think? Did China have a serious role in our economic demise? Is China overlooked? Is this study playing the blame game? Does the 'fact' that CDOs and MBS's smaller representation in new mortgages issued dismiss, or at least raise suspicion, on their critical roles for the financial crisis?
I don't really have the time to go through the report now, but blaming China for what happened seems unfounded. Despite inflows of money from China, the U.S. could've tightened their monetary stance. But, they didn't .
And what about the negative effects the U.S. is causing with its easy monetary policy?? It's causing other countries' currency to appreciate against the dollar, making the central banks of those countries to intervene in the FX market.
But I guess. it's not only the U.S. who is causing this problem. ECB will do the same thing as well. And other countries are lowering their base rates to zero.
This whole thing is just insane...This system will blow up sooner or later.
China-bashing typically becomes a trend right before elections.
What's next? Blame China for Greece?
China played a role, but the conclusion in that article is far-fetched. Exports are a big part of China's economy and a weak currency is an important part of that strategy. Chinese central bank printed a lot of yuan, used it to buy to $$$, used $$$ to buy T-Bills/bonds. They did this aggressively, so lowered US borrowing costs (aka low interest rates). Low rate = easy money for home buyers.
Right. But that doesn't mean that China "sparked" a financial crisis; there were a lot of causes that led to the crisis (e.g. the CDOs and MBSs you mention). Did China use their magical Panda powers to force GS to package derivatives? No.
China has had a high savings/investment rate since the 1990s, and the article title is extremely misleading to suggest that China caused the crisis. Over-saving/investing is actually coming back to bite China in the ass because they're overleveraged in private sector infrastructure projects.
The logic of the article is following: Those sneaky Chinese are so prudent with their finances that they save too much. As they save too much and buy US bonds, interest rates in the US go down. As interest rates in the US go down, US consumers borrow more then ever. Eventually US consumers become insolvent and crisis happens.
So the source of the crisis are prudent Chinese savers, not the US citizens who borrowed too much hoping to repay loans from higher prices of real estate on which they had been speculating...
Can anyone find any logic in this? I can't...
There is some credence to this, although I wouldn't go so far as to say that China "caused" the crisis.
I recall that my college roommate, who was Chinese, told me about how his family bought several houses with the intention of selling them at a profit within the next season or two. They had an entire operation going on, with financial backings from easily attainable mortgages and from relatives overseas. Furthermore, China's strict 70-year home ownership policy has the country's wealthy buying properties in other countries, namely the United States. So it's not unreasonable to say that this wasn't one Chinese family speculating and/or buying-and-holding US real estate assets, but an entire community who could afford to so. And it's not difficult to connect the dots, that this foreign demand stimulated the securitizations and tradings in CDO's & Mortgage Derivatives.
But to be fair, many Americans were also doing the same exact thing. This was a systematic phenomenon that wasn't limited to only the Chinese community. Unless there are some actual figures that breaks down the demographics of the housing turnovers, and how they were correlated to exotic tranches mortgage derivatives, the author's argument is moot.
The one thing the US can't outsource to China is blame for the crisis.
Well said, short and crisp.
American people spending money they didn't have on things they couldn't afford caused the financial crisis. Yes there were foreign participants involved in all aspects of the bubble and aftermath, but in such a small proportion that they most certainly did not "cause" the crisis.
How dumb or uninformed you have to be to read something like "China—Not Wall Street—Caused 2008 Crisis: Study" and think "This must be a huge scandal!". Take the good with the bad, the US has both and live with it, the crisis was a mistake born in the US as much as (sadly) the european debt crisis is because of the euro, just accept it. In the words of Keynes, "When the facts change, I change my mind. What do you do, sir?", don't try to adjust the world to your beliefs.
IMO, China is ZERO percent responsible for the latest economic recession. Actually, Greece had more of a role in this crisis than China, but I won't take up much time to explain that. That still doesn't change the fact that China will do nothing to help the US and for good reason. Seriously does anyone expect the Chinese -- a nuclear superpower with the world's largest consumer market -- to bow down to a nation that they despise and follow whatever they are asked of?
The representation for CDOs and MBS's might be a little bit misleading as in a lot of cases multiple bets were made on single securities so the actual number of references in each of the banks' books is higher. Also realize that the relatively low representation of dismissed CDOs and MBS's doesn't illustrate the compounding effect that these types of securities have on the financial system (i.e.: greater sensitivity to drops in housing prices) compared to other "minor" securities that were dismissed.
The storyline to this housing bubble is lengthy and complicated, but to summarize it all into one cause...it all leads back to this widely pervasive belief on Wall St. that risk was minimal. This justified banks to implement countless different strategies all with the sole purpose to financially capitalize on the rising demand of the housing market; however, due to the complex nature of the pipeline it's hard to mathematically rank which products hit the economy the hardest.
Not such a novel idea.
1) Excessive capital inflows from foreign savings due to USD's reserve currency/safe haven status
2) Interest rates suppressed below equilibrium and capital is grossly misallocated
3) Music finally stops and the bubble pops
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