I always find it tricky to listen to The Financial Times's Martin Wolf. British accents have a way of overwhelming my critical faculties. And true to form, speaking last night at a dinner panel alongside Laura Tyson and George Soros, he made a lot of sense. But looking at my notes today, I think it was honest sense, rather than accent sense. So I'll reproduce his argument here: What Americans think of as a national financial crisis that sprang from a national housing bubble is really a global economic problem. "This is a first rate macroeconomic crisis," he said, "of which the collapse of your financial system is just a part." Americans tend to begin their narrative at the subprime housing crisis. Wolf doesn't. He begins his narrative in the flight of emerging market capital. In recent years, he argues, emerging countries began to view current account deficits as inescapably tied to currency crises. They turned to surpluses as the answer. The currency reserves of developing economies shot from $1.5 trillion to $7 trillion. That money had to go somewhere. And their bank, essentially, was our country. But creating the level of demand necessary to absorb that amount of money is actually dangerous for an economy. Wolf argues that recent bubbles were not accidental. "The biggest stock market and housing bubble in history were both in the last decade," he said. "And both were supported by monetary authorities. Their purpose was to sustain demand."Tyson offered another version of Wolf's story. In broad outlines, it was quite the same: Global pressure forces the United States to generate much more demand than it can actually sustain. But she identifies a different causal trigger. "Living standards," she said, "are decided by the supply side, not the demand side." She invoked Harvard economist Richard Freeman's argument that in the 1990s, "China, India, and the ex-Soviet bloc joined the global economy and the entire world came together into a single economic world based on capitalism and markets. This change greatly increased the size of the global labor pool from approximately 1.46 billion workers to 2.93 billion workers." He calls this "the Great Doubling." Tyson recalled it in her remarks. "As the supply side increased," she said, "we supported the demand side in an unsustainable way." American workers were making less but consuming more. They funded this with credit, with borrowing, and with bubbles. If the cause was global, than it follows that the consequences were global. "Lehman's failure was the game-changing event," explained Soros. It proved that a financial system could fail. The United States responded with an implicit guarantee that they would not allow any other banks too fall. Our country had the credibility to offer that assurance. Others didn't. "Countries at the periphery of the system couldn't guarantee against failure in the way America could," Soros continued. "So capital fled their markets for our market. When our dollar strengthened, Eastern Europe and Brazil went into crisis." We were able to respond so aggressively, and borrow the necessary funds at such low rates, because capital has fled the peripheral economies and sought haven at the U.S. Treasury. But that implies a certain responsibility to those peripheral economies. "The emerging countries cannot print money," concluded Soros, "so relief needs to be provided so they can protect their banking system and spend countercyclically."The problem, of course, is that America would have trouble finding the funds to backstop a national financial crisis. Ending a global financial crisis may be beyond even our capacity. But it is, of course, the preferred outcome for every other country, particularly the European economies that might otherwise be expected to contribute aggressively. "No one will help America if America's willing to run these debts," said Wolf. "The rest of the world wants to free ride." EXPLAINING THE *GLOBAL* ECONOMIC CRISIS.
I always find it tricky to listen to The Financial Times's Martin Wolf. British accents have a way of overwhelming my critical faculties. And true to form, speaking last night at a dinner panel alongside Laura Tyson and George Soros, he made a lot of sense. But looking at my notes today, I think it was honest sense, rather than accent sense. So I'll reproduce his argument here: What Americans think of as a national financial crisis that sprang from a national housing bubble is really a global economic problem. "This is a first rate macroeconomic crisis," he said, "of which the collapse of your financial system is just a part." Americans tend to begin their narrative at the subprime housing crisis. Wolf doesn't. He begins his narrative in the flight of emerging market capital. In recent years, he argues, emerging countries began to view current account deficits as inescapably tied to currency crises. They turned to surpluses as the answer. The currency reserves of developing economies shot from $1.5 trillion to $7 trillion. That money had to go somewhere. And their bank, essentially, was our country. But creating the level of demand necessary to absorb that amount of money is actually dangerous for an economy. Wolf argues that recent bubbles were not accidental. "The biggest stock market and housing bubble in history were both in the last decade," he said. "And both were supported by monetary authorities. Their purpose was to sustain demand."Tyson offered another version of Wolf's story. In broad outlines, it was quite the same: Global pressure forces the United States to generate much more demand than it can actually sustain. But she identifies a different causal trigger. "Living standards," she said, "are decided by the supply side, not the demand side." She invoked Harvard economist Richard Freeman's argument that in the 1990s, "China, India, and the ex-Soviet bloc joined the global economy and the entire world came together into a single economic world based on capitalism and markets. This change greatly increased the size of the global labor pool from approximately 1.46 billion workers to 2.93 billion workers." He calls this "the Great Doubling." Tyson recalled it in her remarks. "As the supply side increased," she said, "we supported the demand side in an unsustainable way." American workers were making less but consuming more. They funded this with credit, with borrowing, and with bubbles. If the cause was global, than it follows that the consequences were global. "Lehman's failure was the game-changing event," explained Soros. It proved that a financial system could fail. The United States responded with an implicit guarantee that they would not allow any other banks too fall. Our country had the credibility to offer that assurance. Others didn't. "Countries at the periphery of the system couldn't guarantee against failure in the way America could," Soros continued. "So capital fled their markets for our market. When our dollar strengthened, Eastern Europe and Brazil went into crisis." We were able to respond so aggressively, and borrow the necessary funds at such low rates, because capital has fled the peripheral economies and sought haven at the U.S. Treasury. But that implies a certain responsibility to those peripheral economies. "The emerging countries cannot print money," concluded Soros, "so relief needs to be provided so they can protect their banking system and spend countercyclically."The problem, of course, is that America would have trouble finding the funds to backstop a national financial crisis. Ending a global financial crisis may be beyond even our capacity. But it is, of course, the preferred outcome for every other country, particularly the European economies that might otherwise be expected to contribute aggressively. "No one will help America if America's willing to run these debts," said Wolf. "The rest of the world wants to free ride." 
