too much moneyCould it be possible that too much money is at the root of our present day economic troubles? As odd as it may seem, the thrust of this peculiar argument has been put forth a while ago by none other than Ben Bernanke, Chairman of the Federal Reserve. He made his case in 2005 that “too much capital, chasing too few investment opportunities” can create distortions with in an economic system, and in extreme cases endanger it.

The idea that a global savings glut can do more harm than good is actually worth considering in view of what happened to the global economy circa 2007. To be sure, there can be little doubt that a worldwide demand for high yielding mortgage paper drove Wall Street to devise a wholly perverse class of incentives it used to induce wholesale mortgage brokers to generate that massive stockpile of mortgage portfolios it wanted during the heady days of the U.S. housing boom. As a response, these mortgage wholesalers did what all rational actors do when demand for their product goes sky high within an economic system — they dig up more of it. To get their hands on this badly needed mortgage paper, the wholesalers put pressure on the retail lending institutions to lower their underwriting standards and find more borrowers. The rest as they say is history.


Tags: ,