Who is to blame? Start with the Chinese for saving too much money, and the Americans for spending it. The Australian government, regulators and banks cannot escape responsibility either.
Borrowed money paid for a new gilded age in many Western countries between 2000 and 2005. This is the story of how it all went wrong, and who was responsible.
The basic cause was too much easy money, and the reason was the phenomenal growth of China. To boost its exports, China held down its currency against the United States dollar. It then lent its huge pool of US dollar earnings back to US investors and consumers - at rates set low by then US Federal Reserve chairman Alan Greenspan to avoid a recession after the dotcom crash. The US and the rest of the world was awash with cheap money waiting to be lent.
Money looking for somewhere to go pushed up the price of assets such as shares, companies, infrastructure - but most of all US property. It created the first global asset bubble in history. Churning the money around was an overblown finance sector, increasingly a highly profitable end in itself.
The Chinese and the Americans were not the only ones at fault. Other governments, including those in Australia, encouraged share ownership without outlining the risk. Regulators, including the Reserve Bank of Australia and the Australian Prudential Regulation Authority, allowed asset prices to soar. And the banks took full advantage of the easy money, lending too much without taking into account the risks.
However, no one could beat American enthusiasm for debt. In the race to lend money anywhere for anything, any regard for lending risk disappeared. By June last year, CCC-grade junk bonds issued by high-risk companies were selling as cheaply as no-risk US Treasury bonds. For the first time in history, investors in debt were paying to take the risks, one observer noted.
At the leading edge of the credit boom were US sub-prime mortgages, encouraged during the recession-hit Carter era to house America's working poor. By the loose-money Bush years, sub-prime loans had been transformed into an unintended lending free-for-all. The failure of poor borrowers to repay, often a certainty because of the teaser rates used to lure them in, did not matter to lenders because the price of houses was rising constantly.
The big money to be made out of all this lending and borrowing was in the use of credit derivatives - once used to spread risk but seen increasingly as a means to extract even more profit from the debt business.
In late 2006, US house prices finally peaked to embark on a national slide of 20 per cent - or more than 40 per cent in the high-growth sunbelt states - by 2008. Sub-prime loans comprised only 13 per cent of US mortgages but the taint began to spread rapidly. By July last year, agencies started down-rating hundreds of millions of dollars in bonds backed with defaulting mortgages.
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