Image: iStock

US policies are responsible for America’s economic problems, not China. Perhaps the most damaging such policy was the repeal of the 1933 Glass-Steagall Act (GSA) in 2000, which paved the way for “casino banking” practices that eventually led to the 2008 financial crisis and the “Great Recession.”

The GSA was the result of a nationwide financial breakdown caused by reckless banking practices in the 1920s. In those days, retail or commercial banks were allowed to invest in businesses and were relatively liberal in making loans.

During the 1920s, known as the “Roaring Twenties,” America’s economy was booming, emboldening banks and people to invest in risky businesses and speculate in the stock market. Like all good things, however, the overconfidence in the market popped like a bubble, causing a nationwide financial meltdown that in turn might have caused the 1929 stock-market crash and the 1930s Great Depression.

Reckless banking practices were blamed for the financial breakdown, resulting in the passing of the 1933 GSA, which barred commercial or retail banks from engaging in risky investments and placing them under strict US Federal Reserve regulatory regimes. Investment banking activities were also put under close supervision.

The GSA was credited with the stabilization of banking in the US, which raises the question: Why was it repealed?

There were many reasons – to liberalize the financial system, put commercial banks at the same level playing field as investment banks, etc. For whatever reason, it might have been the root cause of the 2008 financial crisis.

Effects of GSA repeal

The repeal of the GSA gave commercial banks in the investment business greater scope for competing in derivative creation and trading, resulting in reckless practices. Derivatives are contracts whose values are derived from banks’ existing financial assets holdings (such as Treasury bills and mortgages) and their performance. Selling the contracts to investors increases banks’ reserves or lendable funds because the sales proceeds are considered deposits.

Under the fractional reserve banking system, banks are required to set aside a small percentage referred to as required reserves (RR) and lend the remainder, creating a money multiplier the size of which depends on the size of the RR. If the RR is 5%, the amount of money or liquidity that the banking system could expand by is 1/0.05 = 20 times.

In this regard, derivatives are actually stimulus in that they increase consumption and investment, a reason for the United States’ prolonged period of economic growth in the 1990s. The problem, however, is that the more derivatives were being created and traded, the riskier they became because the underlying collateral was riskier. For example, banks were running out of riskless or less risky collateral, forcing them to use car loans and other default-prone assets. Worse yet, the risky assets were used many times, which amounted to selling multiple contracts on the same asset.

Blaming China seems to be a popular pastime in American foreign policy circles. The latest is the US-China trade war, which was launched on the pretext that China was “eating America’s lunch,” when it could be argued that it was the other way around

Equally damaging to the financial system, and by extension to the economy, was the “subprime mortgage,” a low monthly payment that did not even cover the interest charges borrowers were required to pay in a fixed time period. The mortgages were loaned out to people without good credit, money and jobs. When the “subprime” period expired, most could not repay the loans, culminating in massive housing foreclosures and a housing bubble.

The rest, as they say, is history. The developed economies have yet to recover from the financial crisis. But instead of coming to terms with the fact that it was bad policies that created the financial and economic mess, some blamed China.

If things go wrong, blame China

Former Federal Reserve chairman Ben Bernanke and others blamed “excessive Asian savings” (read: Chinese savings) for causing the financial crisis. His logic was the “excessive savings” reduced interest rates, “seducing” the US government, businesses and consumers into a “debt trap” with loans which they could not repay.

Bernanke was wrong for the reasons cited above;  blaming excessive savings is like a criminal saying a bank “seduced” him into robbing it.

Blaming China seems to be a popular pastime in American foreign policy circles. The latest is the US-China trade war, which was launched on the pretext that China was “eating America’s lunch,” when it could be argued that it was the other way around. Taking advantage of China’s relatively “cheap” labor costs, companies like Apple were making huge profits. According to the US journal The Conversation, China earned less then US$8.50 from making Apple’s iPhone, which was selling for around $650.

Contrary to US President Donald Trump’s boast that tariffs on Chinese goods are good for America, the opposite might be true. The tariffs are an excise tax paid by US importers and passed on to American consumers. A joint study by the Federal Reserve Bank of New York, Princeton and Columbia universities estimated that the tariffs reduced US income by $1.4 billion per month because they were passed on to consumers.

In addition, the tariffs adversely impacted investment and farmers and, by extension, economic growth. The World Bank and other supranational institutions estimated that US economic growth would be reduced to around 2.5% and 1.8% in 2019 and 2020 respectively.

With Trump unexpectedly increasing tariffs from 10% to 25% on $200 billion worth of Chinese goods, the US economy could dive lower, dragging the world economy with it. Even Trump’s economic adviser, Larry Kudlow, has suggested that the US economy will be hit by the erratic president’s flawed policies.

It could be argued that it is US politicians and their flawed policies that are “eating America’s lunch,” not China or any other country.

Join the Conversation

78 Comments

  1. Hello, i think that i saw you visited my website thus i came
    to “return the favor”.I’m attempting to find things to enhance my web site!I suppose its
    ok to use a few of your ideas!!

  2. Thanks for one’s marvelous posting! I quite enjoyed reading it, you may be a great
    author. I will always bookmark your blog and will often come back
    at some point. I want to encourage that you continue your great job, have
    a nice holiday weekend!

  3. Hi! This is my first visit to your blog! We are a group of
    volunteers and starting a new project in a community in the same niche.

    Your blog provided us beneficial information to work on. You have done a outstanding job!

  4. Thank you for some other informative site. Where else may I get that kind of information written in such an ideal way? I’ve a undertaking that I am just now working on, and I have been on the look out for such information.

  5. Have you ever considered about including a little bit more than just
    your articles? I mean, what you say is important
    and all. However think about if you added some great images
    or videos to give your posts more, “pop”! Your content is excellent but with images and clips, this site could certainly be one of the most
    beneficial in its niche. Terrific blog! plenty of fish natalielise

  6. This is very attention-grabbing, You’re an excessively professional blogger.
    I have joined your rss feed and sit up for in quest
    of extra of your great post. Also, I have shared your
    website in my social networks

  7. Tadalafil Best Price Venta De Viagra Y Similares Cialis Und Viagra Kombinieren [url=http://cidovir.com]buy generic cialis[/url] Amoxicillin For Kids Dosage

  8. Hello there! I could have sworn I’ve visited this web site before but after browsing through some of
    the posts I realized it’s new to me. Anyways, I’m definitely pleased I
    stumbled upon it and I’ll be book-marking it and checking back frequently!

  9. I have been browsing online more than three hours today, yet I never found any interesting article
    like yours. It is pretty worth enough for me. Personally, if all website
    owners and bloggers made good content as you did, the net will be much more
    useful than ever before.

  10. Fantastic beat ! I wish to apprentice even as you amend your web site, how
    can i subscribe for a blog website? The account aided me a appropriate deal.

    I had been tiny bit familiar of this your broadcast provided shiny transparent concept

  11. Hi! Someone in my Facebook group shared this website with us so I came to look it over.
    I’m definitely enjoying the information. I’m bookmarking and will be tweeting this to my followers!
    Fantastic blog and superb style and design.

  12. Greetings from Idaho! I’m bored at work so I decided to browse your
    blog on my iphone during lunch break. I love the information you provide
    here and can’t wait to take a look when I get home.
    I’m surprised at how quick your blog loaded on my cell phone ..

    I’m not even using WIFI, just 3G .. Anyways, superb blog!

  13. Hello! I could have sworn I’ve been to this web site before but after browsing through many of the posts I realized it’s new to me. Regardless, I’m certainly pleased I came across it and I’ll be bookmarking it and checking back regularly!

  14. When I originally commented I clicked the “Notify me when new comments are added” checkbox and now each time a comment is added I get four e-mails with the same comment. Is there any way you can remove people from that service? Thanks!

  15. A lot of of what you mention is supprisingly appropriate and it makes me ponder the reason why I hadn’t looked at this with this light before. This piece truly did switch the light on for me personally as far as this particular issue goes. But at this time there is actually just one factor I am not too comfy with and while I attempt to reconcile that with the main idea of your position, permit me observe just what all the rest of the readers have to say.Nicely done.

  16. Today, I went to the beach with my kids. I found a sea shell and gave it to my 4
    year old daughter and said “You can hear the ocean if you put this to your ear.” She put the shell
    to her ear and screamed. There was a hermit crab inside and it pinched her ear.
    She never wants to go back! LoL I know this is entirely off topic but I had to tell someone!

  17. I enjoy what you guys are usually up too. Such clever work and
    reporting! Keep up the wonderful works guys I’ve incorporated you guys
    to my own blogroll.

  18. Does your site have a contact page? I’m having a tough
    time locating it but, I’d like to send you an email. I’ve got some ideas for your blog you might be interested in hearing.
    Either way, great blog and I look forward to seeing it
    grow over time.

  19. Please let me know if you’re looking for a writer for your weblog. You have some really good posts and I believe I would be a good asset. If you ever want to take some of the load off, I’d love to write some material for your blog in exchange for a link back to mine. Please shoot me an e-mail if interested. Thanks!

Leave a comment

Your email address will not be published. Required fields are marked *