Singapore’s Prime Minister Lee Hsien Loong was quoted in the Straits Times as saying about the global economic crisis: “We can't go back to where we were before, which is, Asians lend money to Americans… Americans borrow money to spend.”
But why were the Asians lending money to the Americans? Because everybody gained from the arrangement.
The American sub-prime crisis is blamed for the global crunch. But the problem would not have spread without globalization. There might not have even been a sub-prime crisis if the Americans didn't have easy credit with money pouring in from Asia and the Middle East.
Asians have to share the blame for the crisis, says an article in Prospect magazine. They bought dollars to prevent their currencies from rising against the greenback and keep their exports competitive in the US market.
But what were they going to do with the dollars? They exported more than they imported from the US. So the dollars went into US investments. And they had so much money to spare they bought not only US treasuries but sub-prime mortgages, leading to the sub-prime crisis. Prospect says:
As Asian central banks recycled their dollars back to the US, they created an enormous demand for dollar-denominated bonds. This resulted in lower interest rates on longer-dated bonds and propelled the real estate market even after the Fed had started raising short-term rates.
As there weren't enough US treasury bonds to meet demand, foreign central banks bought mortgage-backed securities. Wall Street met this demand by creating investment-grade bonds from subprime mortgages. "Asian central banks," writes Richard Duncan (author of The Dollar Crisis), "bear a meaningful part of the responsibility for the global imbalances which are now coming disastrously unwound. They played the part of enabler to America's destructive consumption."
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