The Little Book of Economics: How the Economy Works in the Real World, Revised and Updated

Chapter Seven

All the World’s an ATM

Knitting Global Markets Together

The mess created by subprime mortgages issued to people of doubtful credit should have been the United States’ private headache. After all, the loans were dreamed up to satisfy the American obsession with homeownership. Yet, to leverage themselves to the hilt, Americans had to borrow. If they could only borrow from other Americans, the competition for money would have driven up U.S. interest rates and snuffed out the frenzy.

But, as we learned in the previous chapter, economic borders are melting, in particular for borrowers. Factory workers in Shanghai, mutual fund investors in the United States, sovereign wealth funds in the Persian Gulf, and banks in Düsseldorf are all connected to a global ATM that continuously channels money from savers in one part of the world to borrowers in another. Thus, when U.S. homeowners and the U.S. Treasury needed money, the global ATM matched them to Germans, Chinese, and Saudis who needed a place to invest their savings.

When home prices turned down, the pain was felt not just in the U.S. financial system but by the banks and investors of every country that helped finance the housing boom. IKB, a once sleepy German bank that ran out of opportunities to lend to local businesses, loaded up on subprime mortgage-backed securities. In 2007, it had to be bailed out by the German government. It was joined in the injured ward by French, Swiss, and British banks, Australian hedge funds, ...