FORTUNE -- You would think that having an extra $70 trillion dollars lying around would be a good thing. But then NPR had to go and ruin that.
Back in mid-2008, when the financial crisis was still gaining its legs, the popular radio show This American Life, which is broadcast on National Public Radio, aired an episode that offered a counterintuitive explanation for why the economy was imploding -- too much money. Not a little too much, either. Way, way too much money. The show dubbed it, "The Giant Pool of Money," which was also the name of the episode.
The idea was that a newly rich China and others from emerging markets had gone looking for a place to stash their excess cash. What they found was the U.S. housing market, which offered a seemingly high-reward, low-risk investment. And perhaps it was, before it was overwhelmed by all this foreign cash. That led to lower borrowing rates, easy access to credit, lots of questionable derivatives, and, eventually, a crash.
The show paired its explanation of The Giant Pool of Money with some ominous and engaging music, and it was a hit. Lots of people piled onto the idea that the financial crisis was, at least in part, not our fault. The episode has its own Wikipedia page. It won a coveted Peabody award, and it has spawned three follow-up episodes. International money flows became one of the many things the Financial Crisis Inquiry Commission investigated.
The only problem? The show might have gotten it wrong. It turns out having an extra $70 trillion dollars sloshing around the global economy might not be as bad as some thought.
A new study, which was recently published by the National Bureau of Economic Research, says that only about a quarter to a third of the rise in housing prices in the 2000s can be attributed to foreign investment in the U.S. housing market.
Same thing goes for lending. Only about a third to a quarter of all the debt that U.S. consumers piled up before the housing crash can be attributed to capital flowing into the U.S. from elsewhere.
Even that figure might overstate the role of The Giant Pool of Money in the financial crisis. The papers' authors, which include a professor from Northwestern University and two economists from the Federal Reserve, categorize foreign money flowing into the U.S. in the run-up to the financial crisis into two buckets. One stream they call the "Global Savings Glut," which is essentially This American Life's Giant Pool of Money. The other is the "Global Banking Glut." That was money that flowed from foreign, mostly European, banks looking to get in on the U.S. lending market.
Banks do get their money from savers, in the form of deposits. But the jump in U.S. lending by European banks in the 2000s appears to have been driven by bankers trying to boost returns at a time when Europe's own economy was stagnating, not a surplus of cash. Capital ratios, like in the U.S., fell.
That's not to say that The Giant Pool of Money didn't contribute to the financial crisis. It did. But was it the cause? Probably not. The NBER study's authors say it was significant. Nevertheless, the bulk of what led to the financial crisis, at least 66%, was the result of home-grown issues created in the U.S., not something that can be blamed on evil foreign cash.
The unusual visits follow a controversy about an investigative article involving a Chinese billionaire.
By Peter Elkind and Scott Cendrowski
FORTUNE -- In what appears to be a conspicuous show of displeasure, Chinese authorities conducted unannounced "inspections" at Bloomberg News bureaus in Beijing and Shanghai in the final days of November, Fortune has learned. The visits followed media reports that Bloomberg cancelled a year-long investigation on financial ties between a Chinese MOREDec 2, 2013 12:56 PM ET
The four-year-old virtual currency was once dismissed as something of a fad that only gangsters and drug dealers used, but in recent weeks, it has found new sources of credibility.Nin-Hai Tseng, Writer - Nov 19, 2013 11:33 AM ET
A relaxed one-child policy in China could relax the nation's ultra-competitive dating policy and even ease prices within its booming housing market.Nin-Hai Tseng, Writer - Nov 18, 2013 10:39 AM ET
Top finance executives debate about what the U.S. should do about slowing emerging markets.
By Tory Newmyer, writer
FORTUNE -- There's no debating this: Buzzy emerging markets have lost some of their zip. The question for both American government and business is why -- and what to do about it.
The explanations unsurprisingly are manifold. In a panel discussion at Fortune's Most Powerful Women's summit (subtitled "The Hype is Over -- Now MOREOct 16, 2013 11:28 AM ET
China may be the biggest foreign holder of U.S. debt, but it won't meddle in Washington politics.
FORTUNE -- As Congress drags its feet against a looming deadline to increase the nation's borrowing limit or risk default, China urged Washington this week to act quickly and ensure the safety of its U.S. investments.
The message from the world's second-largest economy isn't surprising. As Chinese Vice Finance Minister Zhu Guangyao noted on Monday, China MORENin-Hai Tseng, Writer - Oct 8, 2013 10:49 AM ET
Citigroup stands to lose the most business, but no bank is immune.
FORTUNE -- Here's yet another risk the Federal Reserve might want to consider as it exits its bond buying program: Could the growing rout in emerging markets create a financial crisis back home?
Rising interest rates in the U.S., sparked by indications that the Fed may slow its bond buying, have translated into a summer of pain for emerging markets. MOREStephen Gandel, senior editor - Sep 3, 2013 5:00 AM ET
Decelerating investment in housing, infrastructure and manufacturing, is dragging on incomes.
By John Foley, Reuters Breakingviews
FORTUNE -- Consumer brands in China are finding their rewards aren't quite as advertised. Growth in purchases of a wide range of goods has slowed sharply over the past year, and companies ranging from Samsonite to Apple (AAPL) are reporting disappointing Chinese sales figures. Consumers in the world's second-largest economy will have their day, but the MOREAug 30, 2013 9:30 AM ET
No one had a better view of the chaos of the financial crisis five years ago than former Treasury Secretary Hank Paulson. In this expansive Q&A, he tells Fortune where the trigger points for the next meltdown may be.
FORTUNE -- To commemorate the five-year anniversary of the financial crisis, former Treasury Secretary Hank Paulson has written a new prologue to his memoir On the Brink, which chronicles the dark days MOREKatie Benner - Aug 28, 2013 10:45 AM ET
A top strategist at Morgan Stanley sees more bearish times for BRICs and a little bit of hope in Europe.
FORTUNE -- In recent weeks, emerging markets, long seen as the darlings of the global economy, have tumbled. Cash is flowing out, pushing down the values of stocks, bonds, and currencies in India, Indonesia, and elsewhere. Brazil's problems have been well documented and are boiling over. China's long guaranteed growth MOREStephen Gandel, senior editor - Aug 22, 2013 9:00 AM ET
|Homeless college students seek shelter during breaks|
|GM names Mary Barra as new CEO|
|Five things you didn't know about Bernie Madoff's epic scam|
|Budget deal hits federal workers|
|Snowden docs had NYTimes exec fearing for his life|