It is absurd to blame the current economic crisis on America when most of the other rich and powerful countries in the world were running trade surpluses. A trade surplus is sign that a country thinks it would make more money investing in other countries then it would make investing in itself. So China, Japan, Germany, Russia, and others had more faith in American and few other countries than they had in their own economies. It was the fact that so many countries had no faith in their own economic future that led to the crisis.

Felix Salmon explains how that worked out for Germany…..

Maybe it’s just that Germany was running a massive current-account surplus, and needed to lend lots of money abroad, and that German banks as a consequence would lend to just about anyone. After all, the $21 billion in exposure to Iceland might be multiples of Iceland’s GDP, but it’s still a mere fraction of German banks’ $311 billion exposure to Spain, or their $241 billion exposure to Ireland.

Germany is likely to lose serious amounts of money on all of those investments. But why did they ever place themselves in a position of loaning more money to Iceland then its GDP was worth? Why were Germans so eager to loan money to Iceland instead of their fellow Germans?

We can restate that same question with America as the subject.

The problem with America is that it was growing its net indebtedness faster then it was growing GDP. In other words, it was destroying capital. This is not sustainable over the long haul. If US GDP growth had kept up with the trade deficit, then the trade deficit would have been a good thing.

But why were the world markets willing to throw vast amounts of money at a country that was clearly a net destroyer of capital? The short answer is obvious. Many large and powerful countries thought they could make more money investing in America then in their own countries. But why?

I don’t know that I can prove the answer to that question. But I can’t help noting that most of the big exporters of capital have one thing in common. They are all facing serious demographic problems that make America’s demographic problems seem like a cake walk in comparison. When you add up China, Japan, Germany, and Russia you have most of the world’s trade surplus by dollar value. You also have a list countries that are at the top of the list as far as having unbalanced demographic.

Of course, there are many countries that have serious demographic problems and yet they are not running trade surpluses. Almost all of Eastern Europe would fall into this category. So one could have a good argument over just how relevant the demographic problems are.

But regardless of the outcomes of such arguments, the fact remains that the root of the crisis stems from the fact that the world depended on America, Ireland, Spain, and a few other such countries to create a decent return on investment. Anyone seeking to solve the crisis must first understand why so many rich and powerful countries had so little faith in their own countries that they preferred to invest huge sums elsewhere.

They say that the failure to bail out Lehman Brothers was a mistake. But given the fact that the cost of the bails that did go through continues to grow, I don’t buy this line of reasoning.

From Calculated Risk…

The Fed has marked down the Bear Stearns assets from $29,526 million to $26,802 million this week. This is a mark down of $2.7 billion or 9.2%. The Fed is now underwater by a little over $2 billion plus lost interest.

From Naked Capitalism….

In case you weren’t keeping tabs (the number and variety of handout-recipients grows with every passing day), AIG was first given a loan (really, akin to a maximum borrowing authorization) of $85 billion with much fanfare and high drama, which was later quietly increased by another $37.8 billion. In the last ten days, AIG has said it intended to borrow perhaps as much as $10 billion through a separate, new commercial paper program.

Bloomberg indicates that AIG is now saying that it might need even more dough, although its latest plea does not have a figure attached to it.

Edit: From Brad Setser….

When the pound falls more in a week than it did during the week of Black Wednesday, the week when Soros famously “broke the Bank of England,” you know big changes are afoot.

From the New York Times…

The American market ended the day down about 3.5 percent, making it one of the best performers in the world.

In short, the whole world went nuts. Still trying to figure out what was going on.

The next exciting saga in the unfolding disaster will come from emerging markets. Hints of the impending trouble are all over the net today. None of it is all that exciting yet, but in the past these kind of rumors and small stories have singled the start of a big blowup (by past, I mean over the last couple of months).

You can see some of what I am talking about with this post at Macro Man.

Or in this story from the Wall Street Journal.

Or in this from Felix Salmon.

Or in this from Naked Capitalism and this as well.

Plenty of more stories out there just like the one’s above.

From the New York Times…

The Wachovia Corporation announced a $23.9 billion third-quarter loss on Wednesday as it prepared to be taken over by Wells Fargo.

From the same article….

Wachovia’s quarterly loss appears to be one of the largest in banking history. It is bigger than the market values of 422 companies that make up the Standard & Poor’s 500-stock index, and slightly more than the gross domestic product of Panama.

From a different New York Times article….

For decades, Americans have considered money-market mutual funds as safe as bank accounts. On Tuesday, the Federal Reserve pledged $540 billion to make sure they really are.

From the Wall Street Journal……

The California Public Employees’ Retirement System, known as Calpers, said its assets have declined by more than 20%, or at least $48 billion, from the end of June through Oct. 10.

Unless returns improve, Calpers is poised to impose an estimated increase in employer contributions of 2% to 4% of payroll starting in July 2010 for about two-thirds of its state employer members, and in July 2011 for the remaining third. Any decision will be made after Calpers knows its returns for the fiscal year.

From the Wall Street Journal….

The government said its reason for taking control of the private pension funds was to protect investors from losses resulting from the global turmoil. President Kirchner said in a speech: “The main member countries of the [Group of Eight] are adopting a policy of protection of the banks and, in our case, we are protecting the workers and retirees.”

But economists said the motive is to provide the government with about $5 billon in annual pension contributions to help plug the government financing gap and avert a second default. “They were in a tight situation and this was an accessible source of funds,” said Buenos Aires economist Aldo Abram.

From Market Wire….

Who would ever have thought that in oil-rich Western Canada we would see diesel fuel being rationed? That’s exactly the scenario taking place in Alberta, Saskatchewan and Manitoba where a severe shortage of truck diesel fuel was playing havoc with truckers throughout the region. Carriers were seeing their fuel supplies rationed by as much as 10% to 50%. The card-lock privileges for all new accounts were suspended by at least one oil company and the hours that card-lock service was being made available to existing customers were being restricted. We were being told that things would not be returning to normal for at least several weeks, if not for the rest of October and November.

All these shortages are beginning to bother me. It is as if even the first world is not first world anymore. It is one thing if prices go up and down, it is another if there is no fuel to be had at all.

It’s more of an emotional thing then anything else. Of all the problems we face, fuel shortages are least of our worries. The slowing economy is likely to cut demand by so much we will not be worrying about refinery capability for awhile. Though that is cold comfort to Canadian truckers who are trying to ship products right now.

From The New York Times…

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

From Gene Logsdon…..

A cash grain farm in the cornbelt sold recently for an eyebrow-raising price just shy of $9000 an acre. It sold for farmland, not industrial development. I suppose that shouldn’t be surprising when USA Today reports that yachts over 80 feet long are still selling at all time high levels despite these disastrous financial times. But I can’t see how corn and soybeans will pay for such high-priced land. The grain markets are way down from summer. Demand for grain from developing countries is down. At least five ethanol plants that were supposed to turn corn into fuel have declared bankruptcy. Fertilizer, seed, and fuel costs are still historically high— fertilizer is selling for as much as a thousand dollars a ton. Some farmers have already bought their seed and fertilizer supplies for next year, thinking that these costs would continue to rise along with grain prices. What if grain prices stay down? We could be looking at a possibility of what one farmer I talk to a lot calls “instant bankruptcy.”

From Felix Salmon…

It’s not easy, being an airline. Thanks to high fuel costs, United lost $252 million in the third quarter, on an operating basis. On the other hand, United was hedged. And as a result of those hedges, United ended up losing, um, $779 million. As a result, United stock rose by 9% today, to $13.75 a share.