Adam Davidson | The Guardian Latest news and features from, the world's leading liberal voice en-gb Guardian News and Media Limited or its affiliated companies. All rights reserved. 2014 Thu, 25 Dec 2014 10:51:16 GMT 2014-12-25T10:51:16Z en-gb Guardian News and Media Limited or its affiliated companies. All rights reserved. 2014 The Guardian Adam Davidson: The banking crisis was caused by too much money It's a weird idea, but consider this: the roots of the financial crisis lie in the fact that there was simply too much money in the world<p>One of the strangest things about the <a href="">financial crisis</a> is that anyone ever believed it wouldn't happen. For years, we now know, banks were lending money to people who couldn't afford it so they could buy houses that should never have been built. The banks then turned the mortgages on those houses into <a href="">ever-more complex financial instruments</a> that are now nearly impossible to value. Then the banks sold all that bad debt all around the world and made sure they got into every nook and cranny of the global economy. <br /> <br />We're told that the US Congress and Treasury Secretary Henry Paulson are close to a deal: they <a href="">have a working plan</a> that will give the Treasury that $700bn budget of taxpayer money to buy up all of those assets, that seem, clearly to anybody, to make no sense whatsoever. It seems impossible but, yes, there was a time – not that long ago – when these weird assets seemed entirely sensible (at least to some), and it was trivially easy to place a clear value on them. <br /> <br />In these overheated Fall days, it's worth going back to that period, roughly 2003 to early 2007, when all this insanity actually seemed to make some sort of sense. The world economy was acting in very odd ways. For the last several centuries, for the most part, most of the wealth in the world stayed in Europe, then started moving to the United States. Then some started popping up in Japan and Australia. Most of the rest of the world had almost nothing. Then, in a blink, this skewed balance of wealth suddenly changed. China joined the world trading system, oil prices hurtled upwards. The result: as <a href="">we reported in this episode</a> of <a href="">This American Life</a> on <a href"http:="""">National Public Radio</a>, huge piles of money appeared in east Asia and a handful of oil-rich states, particularly in the Arab world and Russia. Suddenly, government bureaucrats and the instantly rich in these previously-poor emerging economies were looking for places to park their new-found money. <br /> <br />According to the IMF, in 2000 there were about $36tn in fixed-income investments. By 2007, that number had nearly doubled. There was twice as much money looking for investments, and there were not twice as many investments. That $70tn was looking for a home somewhere – anywhere on Earth – in which it stood a fair chance of finding a nice return. The problem was, hardly any market was growing fast enough to accommodate all that new money. Japan was stagnant; Europe was growing too slowly. The emerging economies that had received all this wealth from abroad simply didn't have many places to go. <br /> <br />There was one market, however, that seemed to be growing faster than any other: the <a href="">US sub-prime housing market</a>. <br /> <br />There is plenty of blame to go around, of course: out-of-date, slow-footed regulators, poor risk management at banks, a sometimes-compliant personal financial press pushing the idea of easy home ownership. We will spend the next few years assessing blame and punishing at least some of those responsible. But when you picture trillions of new dollars pouring into a market at a rate never before matched in history, it is a bit easier to understand how so many were able to convince themselves that everything was working just fine and why so few stopped to wonder: hey, does this make any sense?</p> <a href="">Continue reading...</a> Credit crunch US news US housing and sub-prime crisis Economics Business Banking Financial crisis Thu, 25 Sep 2008 20:03:18 GMT Piet Mall/Getty Well noted: $1 dollar bills Adam Davidson 2008-09-25T20:03:18Z