How did we get into this mess? Certainly, poor regulation. Certainly, wall street greed. Certainly, government-subsidized home ownership. But where did it all start? Poor regulation, government subsidies, and wall street greed are nothing new.
Trade imbalances, offers Bernanke. And the roots can be seen in the fact that Americans don't own any real estate in America anymore. And the fact that Americans don't make anything anymore. Remember when Rockefeller Center was sold to Mitsubishi??
As a result of free trade policies, among other things, Corporate America picks up and moves shop to cheaper labor and regulatory markets. Cheaper labor and regulatory markets start selling Americans cheap stuff, and get a bunch of cash. Americans, instead of making things, buy more stuff from abroad than they sell abroad.
Soon, these cheap labor and regulatory markets start sitting on dollar-denominated savings gluts. What to do with it all? They start snapping up investments denominated in dollars. They're risk adverse, so first it's real estate. Like commercial real estate in Manhattan. Their job is made easier by trade rules greasing the movement of capital across borders.
And then when the real estate market got saturated -- or foreigners' savings grew -- it was AAA rated securities for which they hunted.
Meanwhile, the privatization of pension funds -- both overseas and American -- also start looking for places to dump folks' retirement savings. UK institutional investors and SEIU pension start looking to snap up "safe assets."
Bear Stearns, Lehman, Goldman et al. were happy to comply -- aided by credit ratings agencies. "Structured Finance" entities that bundle and collateralize and securitize home loans, for example. An easy pick, given the glut of home loans.
And so Chinese dollar reserves and retirement savings funds bought those risky assets. A lot of them. And Goldman et al kept making more. The demand for AAA investments was too high not to.
Perhaps it wouldn't have happened if these AAA investments were actually investment-grade. Had ratings agencies and home loan markets not gone bananas. And perhaps there wouldn't have been so many of these crap AAA investments had the U.S. government not bent over for wall street lobbyists to repeal Glass Steagall.
But the money was there to be taken. Somebody would have grabbed for it. We shouldn't be surprised that someone did, and did it poorly.
How do we fix this?
We make sure labor markets and regulatory markets everywhere are on a level playing field. Take care of our trade imbalances. And we get serious about defined benefit pension funds.
