better than their neopopulist and neoauthoritarian
counterparts. They may well do better than East Asia
and especially Eastern Europe. The lesson, in fact, is
one that has global implications.
Remember When
We Were Happy and
Didn’t Know It?
The growth that Latin America experienced in the
2003–2007 period was not unique to the region; it
was worldwide. The period constitutes the fastest
and most broad-based global economic expansion
in human history.
But they were also days of excess. United States
macro policy was amazingly lax. An unpopular war
led to very large fiscal deficits. Monetary policy,
buoyed by confidence that inflation had remained
under control, was also unusually loose. As a consequence, the external U.S. deficit skyrocketed to over
8 percent of GDP.
At the same time, China was pursuing an unsustainable growth strategy that saw its exports expand
by over 20 percent per year, while its consumption
grew at just over 7 percent. The gap was expressed in
a growing current account surplus that, in spite of the
deteriorating terms of trade (associated with the rising price of energy and minerals), went from about 1
percent of GDP in 2000 to an astounding 11 percent in
2008. This surplus led to an unprecedented accumulation of international reserves, invested mainly in
U.S. Treasuries. The large savings in China and later
in the Middle East amply financed the growing U.S.
deficit: instead of the U.S. facing increasing difficulties in covering its financial needs, long-term interest
rates declined to historically low levels.
The best explanation to date for what happened
was bad lending. With large amounts of cash on
hand, financial institutions needed to find new
ways of lending the money out, or new people to
lend it to. This involved taking on much more risk
than would have been prudent, at a time when the
financial industry had become concentrated in
terms of players, and more leveraged and more glob-
ally diversified in terms of assets. If problems arose,
they would quickly become systemically large and
have global impact.
Enter the Super-Borrowers
When the fan belt of a car breaks, the engine overheats, seizes and stops. But a new fan belt is not the
solution at this point. If Wall Street is the belt, Main
Street is the engine. Since the engine has seized,
even fully capitalized banks will be wary of lending
in a downturn, and firms and households would be
unwise to borrow, even if credit were available. Credit crunches often lead to recessions, but the eventual
recovery has never been lead by credit.
1
The investors’ flight to quality means that those
issuing the safe assets are left as the sole remaining
super-borrowers. These super-borrowers—the U.S.
and Japan, mainly—are the only ones left to reestablish financial links and rewire the system.
It’s ironic. Excesses in the U.S. financial system
caused a crisis that raised the attractiveness of the
dollar and of U.S. Treasuries, increasing the de facto
financial power of the country that was probably
most responsible for the advent of the crisis. While
Latin American governments lose access to finance at
the first sign of trouble, preventing them from playing a stabilizing and constructive role during crises,
the U.S. Treasury finds itself able to borrow more
money at better terms than ever before.
How Should This
Super-Borrower
Advantage Be Used?
Up to now, two methods have been employed: propping up aggregate demand directly through fiscal reflation—the $780 billion of fiscal stimulus approved in
February 2009—and recapitalizing the banking system through the $700 billion Troubled Assets Recovery
Program (TARP) and its likely additional successors.
History will determine the wisdom of these decisions. The economics profession in the U. S. has made
an implicit commitment not to repeat the mistakes of
