David Schmick at Weekly Standard: what fundamentally caused the financial crisis


When people asked what fundamentally caused the financial crisis, my answer is not what they expect. I respond with one phrase–the fall of the Berlin Wall. By the early 1990s, after the collapse of the socialist model, emerging market economies such as China, India, Eastern Europe, and the commodity producers wanted to be like the West–capitalists. And they became pretty good at making their economies more productive. This had the effect of lowering real wage costs globally while setting up these economies as powerful exporters.

Soon a global ocean of capital–of excess savings–was beginning to swirl around a liberalized worldwide financial system. Partly as a consequence of the Asian crisis of the late 1990s, most of these emerging market economies by the late 1990s adopted a new export-oriented model for success. They tied their currencies to the U.S. dollar and refashioned their economies as large export platforms. The target: The U.S. consumer who fairly quickly became the world’s consumer of last resort.

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