This American Life
"Alex Blumberg: To help explain out what happened, here's my partner for this hour, Adam Davidson, the international business reporter for NPR. Hey Adam.
Adam Davidson: Hey Alex.
Alex Blumberg: So, I guess the first thing we have to talk about is the global pool of money, right?
Adam Davidson: Right. The global pool of money. That's where our story begins. Most people don’t think about it but there’s this huge pool of money out there, which is basically all the money the world is saving now. Insurance companies saving for a catastrophe, pension funds saving money for retirement, the central bank of England saving for whatever central banks save for. All the world’s savings.
Ceyla Pazarbasioglu: It's a lot of money. It's about 70 trillion.
Adam Davidson: That is the head of capital market research at the International Monetary Fund, the place to go if you want know how much money is in the world.
Adam Davidson: How do we pronounce your name?
Ceyla Pazarbasioglu: That will take two minutes at least. It's Pazarbasioglu.
Adam Davidson: Pazarbasioglu.
Ceyla Pazarbasioglu. I'm very impressed.
Adam Davidson: And, by the way, before you finance enthusiasts start writing any letters, we do know that 70 trillion technically refers to that subset of global savings called fixed-income securities. Everyone else can just ignore what I just said. Let’s put 70 trillion dollars in perspective. Do this. Think about all the money that people spend everywhere in the world. Everything you bought in the last year, all of it. Then add everything Bill Gates bought. And all the rice sold in China and that fleet of planes Boeing just sold to South Korea. All the money spent and earned in every country on earth in a year: that is LESS than 70 trillion, less than this global pool of money.
Alex Blumberg: Wow, that is a lot of money.
Adam Davidson: It is a lot of money. And that money comes with an army of very nervous men and women watching over the pool of money: investment managers. This army is nervous because they don't want to lose any of that money and they also want to make it grow bigger. But to make it grow, they have to find something to invest in. So, for most of modern history, they bought really, really safe, really boring investments: things called treasuries and municipal bonds. Boring things. But then, right before our story starts, something changed, something happened to that global pool of money.
Ceyla Pazarbasioglu: This number doubled since 2000. In 2000 this was
about 36 trillion dollars.
Adam Davidson: So, it took several hundred years for the world to get to 36 trillion. Then, in six years, to get another 36 trillion.
Ceyla Pazarbasioglu: Yeah. There has been a very sharp increase.
Adam Davidson: How's the world get twice as much money to invest? Lots of things happened, but the main headline is all sorts of poor countries became kind of rich making TVs and selling us oil: China, India, Abu Dhabi, Saudi Arabia. Made a lot of money and banked it. China, for example, has over a trillion dollars in its central bank, and there are office buildings in Beijing filled with math geniuses-real math
geniuses-looking for a place to invest it. And the world was not ready for all this money. There's twice as much money looking for investments, but there are not twice as many good investments. So, that global army of investment managers was hungrier and twitchier than ever before. They all wanted the same thing: a nice low-risk investment that paid some return. But then something happened to make matters worse, at this precise moment, one guy took one of that army's favorite investments and made it a lot less attractive.
Alex Blumberg: So, this is where we have to talk about Alan Greenspan, right?
Adam Davidson: We have to.
Alex Blumberg: Alright. But I'm going to promise the people here that this is the last time you're going to hear Alan Greenspan in this story. So bear with us.
Adam Davidson: Here is one of his speeches that really drove that army of investment managers crazy.
Alan Greenspan: The FOMC stands prepared to maintain a highly
accommodative stance of policy for as long as needed to promote satisfactory economic performance.
Adam Davidson: You might not believe me, but that little statement: that is Central Banker speak for “Hey, global pool of money - screw you.”
Alex Blumberg: Come on, that’s not what he said
Adam Davidson: It is! I speak central banker and that’s what he’s saying. What he’s technically saying is he’s going to keep the Fed Funds rate at the absurdly low level of one percent. It tells every investor in the world: you are not going to make any money at all on US treasury bonds for a very long time. Go somewhere else. We can’t help you. And so the global pool of money looked around for some low-risk, high-return investment. And among the many things they put their money into, there was one thing they fell in love with. To get it, they called Wall Street - a guy like this:
Mike Francis: My name is Mike Francis. During the beginning of the mortgage implosion, I was an executive director at Morgan Stanley on the residential mortgage trading desk.
Adam Davidson: Mike was one link in a chain that connected the global pool of money to its new favorite investment, these residential mortgages, the US housing market, and guys like Clarence Nathan.
Think how attractive a mortgage loan is to that 70 trillion dollar pool of money. Remember, they're desperate to get any kind of interest return. They want to beat that miserable 1 percent interest Greenspan is offering them. And here are these homeowners, they're paying 5, 7, 9 percent to borrow money from some bank. So what if the global pool could get in on that action? ..."