The real problem with the economy is that extended accepted patterns of cross-border technology transfer, trade, and finance are simply erroneous

By Michael Mandel

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Is the emporium and housekeeping turbulence nothing more than a crisis of confidence? To listen to Ben Bernanke and Hank Paulson, you might think so. "At the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets," Bernanke told the Economic Club of New York on Oct. 15.

On Oct. 20, Paulson went further, explaining the bank recapitalization program this way: "Our purpose is to increase confidence in our banks and increase the confidence of our banks so that they enjoin deploy, not hoard, their capital. And we expect them to render so, as increased confidence will lead to increased lending."

The entanglement of the Bernanke-Paulson view is that the underlying economic system is fundamentally soundly, so that restoring trust in the financial system will oddity us back on a growing course. From that perspective, the infusion of massive amounts of capital into banks, which replaces the money shameless in wicked mortgages, be disposed capacitate lending to begin again. Once investors see that all is well, then they will cease their irrational behavior, and start putting money back into stock markets and companies with respect to the world.

Treating the Wrong Problem?

But what if the Bernanke-Paulson contemplate is wrong? What if financial inclemency is a symptom, not a cause?

What if we face a wrenching readjustment of the global real economy rather than a crisis of courage rooted in the financial system? What if Bernanke and Paulson are treating the wrong enigma? What allowing that investors, realizing that their long held assumptions well-nigh the global economy are wrong, are rationally bailing out of stock markets in almost every country, at minutest for now?

In fact, in that place’s good reason to give faith to that the current crisis reflects a augmenting realization: Long accepted patterns of cross-border technological transfer, outward trade, and global finance are simply not sustainable.

Three Big Flows

For the past 10 years, global growth has been driven by three big flows. The first flow was the transmission of acquirements, technology, and traffic know-how from the U.S. and other industrialized countries to low-wage emerging economies similar as China and India. Under the neutral name of "provision chain management," multinationals taught local suppliers to make shirts, laptop computers, and airplane rudders that could be sold forward every side the world. Moreover, U.S. and European companies gave suppliers access to enough information that they could develop their own simplest organism phones, software, and other tech products. The result: a massive improvement in productivity and manner of life standards in emerging economies.

The second flow was the movement of furniture and services from China and other emerging economies to the U.S. Massive amounts of production capacity was built around the creation, assuming that the U.S. was always going to be the consumer of last resort. Indeed, the value of U.S. imports—over $2.3 trillion in 2007—was larger than the plenary output of Britain, the sixth-largest economy in the cosmos. The result: Rising active standards in the U.S., rising employment, and fruit around the creation.

The conclusive flow, of hunt, was financial. The rest of the nature lent U.S. consumers trillions of dollars to finance the trade deficit. The money flowed into the country in all sorts of ways, including cheap mortgages and poor credit for cars and televisions that were made overseas. At the similar time, companies in emerging markets were borrowing heavily to build the factories that were going to supply the developed world.

Something Had to Give

This tri-flow worked as long as everyone believed that American consumers could finance their debt. But here’s the riddle: At the like time Americans were borrowing, their real wages were falling—and not just for the smallest educated. By BusinessWeek’s calculations, real weekly earnings for college grads without an advanced degree have dropped every year since 2002.

You have power to’t pay back rising debt with falling wages; something had to give.

The first chattels that broke were subprime mortgages, given to less creditworthy borrowers. But once investors started to look, they realized that the entire global edifice was built on an impracticability. The tri-flow that had built global prosperity could not have being sustained.

Good News and Bad News

That’s why the financial crisis has spread across the globe. Investors are peering at every country, from Kuwait to Korea, asking the theme of inquiry: Is it sound enough to survive if American demand against imports falls? The problem is in the structure of the global real economy, not the financial system.

This is both bad news and good intelligence. The shabby news is that government injections of capital into banks around the world can slow the damage, but they cannot fix the basic riddle. The global management has to go through a readjustment protuberance that choose be difficult even if policymakers can emend confidence in the financial system.

The welfare news is twofold. First, the productivity gains in the emerging economies are actually being. Sooner rather than later, their growth will resume. Second, we do have a cat’s-paw for easing the putting in order, and that’s financial stimulus. With private demand despite credit weak, governments can judiciously borrow and dispose of to help pump up growth and employment.

The conclusive implication: Policymakers should stop talking about investor confidence as granting that it exists in a vacuum. Instead, they should focus on the real limit of stimulating the creation of innovative new goods and services that the U.S. be possible to produce and sell forward global markets. That would reduce the amount of borrowing the country has to carry into practice, and help create a sustainable global economy. This crisis is not any fun. But if it shakes up companies and form of sovereignty, and forces them to focus on innovation, the end result will be stronger, more solid economic increase.