Root of the Problem

Statement by Treasury Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update, Wednesday, November 12, 2008, (Full Text Here).

While Treasury's plans to roll up the Troubled Asset Relief Plan (TARP) for troubled mortgage-related assets - its original mission - and unfurl it over a different section of the mess, namely additional capital support for banks and non-banks and to shore up faltering consumer-credit securitization markets, received the headlines of the 24-hour news cycle, almost overlooked was Secretary Paulson's identification of the root of our extant problems (hat tip CK Michaelson at Some Assembly Required):

"But let us not forget one fundamental issue which lies at the heart of our problems. Over a period of years, persistent and growing global imbalances fueled a dramatic increase in capital flows, low interest rates, excessive risk taking and a global search for return. Those excesses cannot be attributed to any single nation. There is no doubt that low U.S. savings are a significant factor, but the lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe have also fed the imbalances." (Emphasis Ours.)

This paragraph is toward the end, before his concluding remarks. It implies if not for the thriftiness of Asians and Middle-Easterners (mostly Asians) and the accumulation of reserves in those countries, which were lent back to the United States in the form of Treasury and Agency debt purchases to offset the complete lack of savings in America, our low interest rates and consumption binge of the last decade (two?) could not have been enabled.

Ah, so it's their fault. Their propensity to save, instead of consume, enabled our low-interest consumption blow-off. Unfortunately, if Asia and the Middle East decide to begin consuming in earnest (less likely short term), or choose not to recycle their savings into U.S. government debt (increasingly likely), an immense funding demand by the Treasury to support the unprecedented bailout and deficit spending programs of this country is destined to result in higher interest rates in the future - perhaps much higher - as the government crowds out other borrowers in its insatiable quest for fresh funds.

What a relief: It's all their fault. Oh, and those pesky structural issues in Europe. Of course our abysmal, nearly non-existent savings rate is a factor, but at least it's not OUR fault. Check please.