Don Kohn Explains The Financial Crisis... By Blaming Those F%^&ing Chinese
If you wondered why the economy fell apart and thought perhaps it had something to do with too much fake capital being pumped in to capital markets thanks to impossible-to-account-for derivatives and other exotic financial monstrosities, you're totally wrong, says still Fed Vice Chairman Don Kohn.
It was because those fucking Chinese saved too much money:
Large and growing global imbalances were a perennial topic in meetings of international policymakers for years prior to the crisis because they were seen as threat to the global economy. From 1996 to 2006, the U.S. current account deficit widened dramatically, from about 1-1/2 percent of gross domestic product (GDP) to 6 percent. This widening primarily reflected a fall in domestic saving, as domestic expenditures became increasingly reliant on borrowing from abroad.
The counterpart to the rising U.S. deficit was a surge in the current account surpluses of other countries. In some Asian emerging market economies, current account surpluses arose as domestic investment collapsed after the financial crisis of the late 1990s, and domestic demand in those countries never recovered enough to absorb their strong saving. For China, investment spending was very strong, but it was outpaced by even greater increases in saving, reflecting, among other factors, the weak social safety net and an underdeveloped financial sector. In these countries, economic growth heavily depended on external demand, in part reflecting policies to keep exchange rates artificially low through intervention in currency markets. To some extent, the resulting rapid accumulation of official reserves was welcomed as a buffer against the possibility of another sudden reversal of capital flows, as had occurred in the 1990s. But by resisting appreciation of their currencies, these countries, to some degree, circumvented the usual balancing mechanism for economies that run increasingly large current account surpluses. Germany and Japan significantly depended on exports as a source of economic growth and ran large current account surpluses as well. Finally, surpluses of oil exporters rose sharply with the escalation in oil prices, as their spending lagged rapid income gains.
As a result of this pattern of surpluses and deficits, capital flowed strongly to the United States from rapidly growing emerging market economies and some advanced economies. Observers feared that, at some point, investors would decide they had enough dollar assets in their portfolios and pull back abruptly from financing the burgeoning U.S. current account deficit, triggering a sharp decline in the dollar, a spike in interest rates, and widespread economic distress.
Of course! Why didn't we think of that?
Kohn also fails to mention that it was, in fact, the US that demanded China take its payment in US Treasurys and other loller dollar (tm LOLFed) "assets", so in essence he is saying it is really all OUR fault.
He also neglects to mention that capital was flowing into the United States because we were marketing Fannie and Freddie as super-safe, awesomeOMGkickass investments for foreigners looking to stash their cash. The 2006 real estate market spoke for itself and the pimps of debt could spend their days snoozing instead of actually trying to convince anyone to buy the crap.
Awwww, we're broke and it's totally because of the Chinese. Mmm hmm.