Who caused the global financial crisis?

U.S. President Barack Obama at the G20 summit in
April, 2009 in London, to discuss measures to tackle the
global financial crisis. (Peter Macdiarmid/Getty Images)

The U.S. financial turmoil has affected the world. It has expanded from the potential economy in the beginning to the real economy around the world. The devastating and serious state of the global economic crisis is nearly the same as the big recession in America during the second decade of the last century.

The Chinese stock market fell by 75 percent for more than six months. The stock market in South Korea, Hong Kong fell more than 50 percent. In Europe, the decline of stock markets in France, Germany and England was more than 40 percent. Iceland and some other countries were on the verge of national bankruptcy.

In the United States, the international economic giant, has also incurred a more than 30 percent stock market decline. In this situation, various learned people cannot help asking: who is responsible for the global economic crisis, who is the chief culprit in the global economic crisis?

If we view this issue in a simple way, it is easy to put the blame on the United States. The reason is very simple: The U S is the country issuing American dollars; more than half of the world-wide financial transactions are proceeding in this country. The Americans are consumers in advance. They do not take savings as a serious matter. The nation consumes nearly one-third of the world’s energy. Today the global financial turmoil broke out from Wall Street. Who else except the United States could be the originator of the disaster?

Is it true? As long as we investigate the case seriously, we will find that the global financial crisis originates in the overflow of global currencies. The financial crisis in the U.S. derives from the bursting of the bubble in the course of trading financial instruments, mainly derivatives. The source of the transaction of these derivatives came from the overflowing funding. The real economy cannot absorb so much money in spite of the influx of global funds flows into the United States.

For their own benefit the American financial institutions had to loan the funds to various groups of people by all means, or else the banks and financial institutions would run at a loss. Land and housing loans are the most favoured and safest mode of all the bank and financial institution loans. In the circumstances of surplus funds, the banks have to continue degrading the terms for housing loans so as to facilitate more people to borrow. The banks can therefore release the money.

The low requirements for borrowing money from the bank resulted in the prosperity of the real estate market. A large number of people could easily buy their dream homes under the very low bank loan threshold. This caused housing prices to soar.

Nevertheless, the banks and financial institution managers are not fools. They foresaw the consequences of this kind of behaviour.  Their major concern was to reduce the risk of loss for their institutions.

It is clear that the best way to reduce the risk is by means of lending bonds and debentures. The banks therefore packaged their loans in hand and sold them through the financial companies. The risk has then been transferred from the bank to the financial institutions in Wall Street and into the hands of global investors.

Excess cash flow

Many people may wonder: Were the global investors all silly? Didn’t they know that they were taking the last baton in the game? The investors were, of course, not stupid. However, due to the excess of cash flow in the international community, a large number of funds had nowhere else to go.  The world’s real economy was saturated. How were they going to invest their money? If the money was not invested, it would inevitably depreciate with inflation. Who is willing to see their wealth constantly shrinking? Investing money in the transactions of derivatives in Wall Street was their only choice.

At this point, many people would wonder where these excessive funds came from. Why did the United States issue so much money?

Basically speaking, the U.S. government has indeed issued too much currency, but this is not the original intention of the U S government. In order to reduce issuing U.S. dollars, the government has been promoting global trade and repeatedly negotiating trading with China and many Asian export trading countries. In these Asian export trading countries, their surplus products were mainly exported to America in exchange for U.S. dollars, especially in the last decade. During this period, China, Japan, Taiwan, Singapore, Hong Kong, Thailand, Malaysia and even the lately rising Vietnam all consider the United States their export trading object. Their priority is to earn more U S dollars.

China's full control of currency

Among these countries, China is the most special one. This country has a policy that the government has full control over foreign currency. The policy has greatly limited the sale of U.S. products and the flow of U.S. dollars into China. China is also the only country in the world which has accumulated through export trading a huge amount of U.S. dollars in the foreign exchange reserve.

As foreign currency cannot circulate in China, the government had to issue a large amount of Chinese yuan. This has resulted in a distorted phenomenon: devaluation of the yuan within the country but rise in the value of yuan outside the country. At the same time, due to the currency circulation system, China cannot bring back the large amount of U.S. dollars, which can only be kept in the United States.

As China lacks a large number of talented and professional investment managers and the government's domestic political situation is full of fear and anxiety, these trillions of reserved dollars are ready to meet the needs that may arise on the verge of the domestic economy crisis. Therefore the Chinese Government was not able to make long-term investments, nor could it invest the money with the real overseas economy. Its only choice was to put these huge foreign exchange reserves into the financial institutions at Wall Street for short-term investment transactions, in order to cash in at anytime.

The export conditions in other Asian countries is similar. Japan is already a country with a free economy market, however, to ensure that the country's flow of yen will not be eroded by the U.S. dollar, the government continues to carry out various types of policies and economic means of control to expel the U.S. dollars from the country. Under these circumstances, the world's exporting countries continue to earn U.S. dollars.

Low cost products

On one hand, they provided the Americans with the world's finest and low-cost products, but at the same time, a large amount was returned to the financial market at Wall Street. The flow of this huge amount of foreign reserves of U.S. dollars into the United States is bound to cause the expansion and development in the transaction of the American investment instruments. It will ultimately trigger financial crisis in the United States and then trigger financial crisis in the real economy.

It is no doubt that there are problems in the U.S. financial regulatory system. But the loophole in this regulatory system is not the real cause of the problem. The actual way to solve and prevent future financial crisis is addressing the fundamental problem of blocking the liquidity of surplus dollars. In order to solve this problem, we should find out if the chief culprit of the financial crisis is the United States. It is obvious that the Asian export trading countries are the originator of the liquidity of surplus American dollars. Among these countries China, being the owner of a huge amount of foreign exchange reserves, is obviously one of the biggest culprits.

China as well as all the Asian countries which rely on export trading should genuinely reflect on this matter. When a system goes wrong and people do not reflect upon it, this will lead to a very serious problem. People’s awareness should not focus on only one point, but they should view the overall situation. The world needs balance in every aspect. If one side cannot keep balance, then the system will not be able to survive. The real solution to the global economic crisis is not only a matter of the United States.

All countries should seriously solve their own problems. First of all, it is necessary for China to consider how to expand its domestic demand and to solve its domestic problems. If China's economy improves, many of the world's economic problems will be solved. If the Asian export trading countries solve the problem of domestic demand, the global economy will be in balance and smooth. The economic crisis will then be resolved.

If we view it from another angle: why has America, being the cause of the economic crisis, incurred the least harm? From this point of view we can also see that the current economic crisis did not focus on the United States, but on the export trading countries. China is the country which suffers the most. The decline in its stock and housing markets are the worst in the world.  From this event we can see where the essence of the problem lies.

Cao An is a well known American economic and political commentator.