Globalization and the recession

Economists are still trying to decide what caused the great recession. Much of the focus has been on excessive loans, which ultimately led to credit issues and the collapse of the housing market. But as N.C. State University economist Mike Walden discusses, there are other possible explanations.

“We … economists are still going through what led up to the great recession. Recently, there’s been a lot of focus on the impacts of globalization. One of things that resulted from globalization was that there was a large accumulation of investable funds in new countries — countries that really weren’t in this game before, particularly in Asia, particularly China, and also in the Middle East, for example, with the oil-producing countries.

“And in the early part of the 2000s, as globalization really took hold, these countries were looking for places to invest those monies. Now, traditionally a lot of that money would’ve gone in the stock market, but we’ve had a collapse in the stock market related to the tech problems — problems in the technology sector in 2001 — and so there were some bitter aftertaste of the stock market in the early part of the 2000s. And so, the explanation goes, a lot of that money eventually went into the housing market. Housing was always considered to be a safe investment, both the building of homes and the financing a home through mortgages.

“So you can really trace a large influx of globally generated savings going into housing markets, both in the U.S. and in Europe that many say caused the housing markets in those countries to overheat and then ultimately cause the crash in those housing markets, which really led to the great recession. So this is a somewhat new way of looking at the causes of the great recession, really linking it to globalization.”