Gluttonous Americans?

Paul Krugman has an interesting column today looking at the roots of the financial crisis.

The simple story is that people borrowed too much: to buy big houses, fancy electronics and other entrapments of the American dream. But why would people all of a sudden start borrowing so much? The answer is a global savings glut:

"In the mid-1990s... the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world.

The result was a world awash in cheap money, looking for somewhere to go."

Currency crises like the one in Asia are frightening experiences, and governments who have gone through them are concerned about having enough cash on hand in case something goes wrong. So these East Asian countries took the money they earned by selling exports and amassed it in case of a rainy day. But, of course, that money had to go somewhere, so it went into the US and other economies and fueled an era of cheap borrowing.

This is not a wholly unique story. In the 1970s, oil exporting countries were awash with cash as the price of oil spiked. That money had to go somewhere and it ended up going to projects in Latin American, which helped cause their debt crisis in the 1980s.

The simple answer for our current predicament is that American consumerism compelled people to borrow more. But something real had to happen in order to set this off, like lots of cheap cash flowing into the country.