I just listened to this "This American Life" episode as it was happening last Saturday while I was busy cleaning/organizing my garage. It is really, I mean really, a must listen if you care at all about the financial crisis and want to be an informed citizen. Its a second pass on an episode that played almost a year ago.
1) The total amount of money in the world in fixed-income securities (in other words savings) in 2006 was $80 trillion which was more than double it was in 2000, at that time it was $36 trillion.
2) This is more than the entire world spent and earned in the entire world, a lot of money. The story of the world post 2000 was that globalization really kicked in, with off-shoring and trade, and countries like China and India and the oil producing countries started making a lot of money, and they all essentially banked it.
3) The world wasn't ready for this amount of money, money that had a lot of investors with itchy fingers looking for ways to both keep it safe and to make it grow. But there wasn't twice enough good investments in the world to absorb twice enough money in savings.
4) Allan Greenspan made a really bad situation and made it worse when he essentially kept the Fed Funds rate at 1%. To quote the transcripts of the original episode, Greenspan basically told the "Giant Pool of Money", "screw you".
As a result of this, the giant pool of money started to trend torward real estate investments as more money came into this market, they needed to find more people willing to take on mortgages on buy real estate. And that is essentially what caused the massive debilitating real estate boom.
Most of the essence of this I got from the original episode. The follow up tracked down some of the people they interviewed in the original show to see what they were doing now.
Some conclusions - many people on wall street are evil and could care less about the average person. Its not a market that cares about the average citizen. Some people are still hanging out in their homes not having made a mortgage payment in 3 or so years and have yet to be foreclosed on - since the banks are flooded.
The size of the giant pool of money now a year later? More than 80 trillion dollars. Why? Because government all around the world have poured money into the banks in hopes of trying to get the money back into the market.
So far, banks are still holding tight on the money. The primary reason we have double digit unemployment right now, is that no one is spending that money. Its being stashed away in accounts that are essentially earning no interest. There's still a lot of fear.
It seems to me that $80 trillion dollars is wayyyy too much money to have stashed away in savings. Especially considering many of those countries with high savings are countries that are in desperate need of infrastructure. The problem essentially is that the money is being held (in my view) in the hands of a very small percentage of the global population. When you have economic disparities as high as we're currently experiencing, you end up with bubbles. Too few people controlling too many assets leads to a lot of crazy swings.
In the US, its interesting that when the dot com bubble crashes and we experienced a quick recovery, it was a jobless recovery, and that recovery introduced much of this disparity (speaking off the cuff here).
If that money was spread out more evenly, you would see much stronger long term growth (albeit slower in the short run), you would see less bubble/bust cycles. How do you do that?
Invest it in infrastructure, in ways that strengthen the many: education, highways, the environment, health care. China and India have massive needs in this regard. As the general population feels greater security (Chinese population saves 50% of their income on average, so I"m told, because many don't have access to some sort of health insurance), they will invest and spend, which should also help our large trade deficit. As China and India consume more, the US will have a greater opportunity to become producers and not just consumers.
These sort of imbalances take time to correct though...