Great Wall of Worry

What caused the financial crisis?

Some say it was excessive leverage at the investment banks. Some blame Fannie and Freddie. Nearly everyone points at greedy bankers and clueless borrowers taking out no-income, no-job, no asset loans on D-class properties via sub-prime mortgages. And of course, there’s Greenspan, Geithner, Bernanke, Barney Frank, Hank Paulson, and George W. Bush. But until now, no one has really blamed the Chinese.

A recent study notes that the Chinese trade surplus of mid-decade led to massive savings that, combined with Fed policy, kept interest rates low, facilitating mortgage borrowing and fueling the housing bubble. The integration of China and India into the global markets added over 2.3 billion producers and consumers–providers of core goods and services and as consumers of non-core commodities. Their mercantilist trade policies and 30% personal savings rate fed the “global savings glut” that kept mortgage rates low even as the Fed raised short-term rates from 1% to 5.25%.

But pinning the blame on Chinese mercantilism or Wall Street fat cats or sleazy mortgage brokers is a fool’s errand. Finding the source of the trouble is an exercise in infinite regress: economies are adaptive, filled with feedback loops and dynamic incentives. People change their behavior as conditions change, and conditions are always changing. The global financial system created the financial crisis. And we’re all part of that system.

If we’re looking for lessons learned from the financial crisis so we don’t make the same mistakes again, good. There’s plenty to be learned. But if we want a scapegoat to pin the blame on and feel better about ourselves, don’t waste the time or energy. We should just fix what we can, and adapt.

Douglas R. Tengdin, CFA
Chief Investment Officer
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